Unemployment Risk, Labour Force Participation and Savings

This paper analyses labour force participation and precautionary savings in the presence of risks of being fired or failing to secure a job offer when out of the labour market. We use a finite horizon framework with two employment states and a stage utility function which is CARA in consumption but non-separable in leisure. The results are that there is precautionary labour force participation: employment risk lowers the reservation wage; generally it also reduces consumption. However due to the non-separability assumption, precautionary savings, as usually defined, may not be positive. We characterize the reservation wage and contrast the results with those in which the stage utility is additive in leisure and consumption. We extend the analysis to study the effects of cyclical variation in employment risk, of stochastic future wage rates, and of adding a third employment state of search.     

Labour-incentive reforms at preretirement age in Austria

Low participation rates of older workers in the labour market threaten the sustainability of the pension system in Austria. Given the current political debate on this issue, we try to shed light on employment and retirement behaviour of Austrian couples when income support is provided and pension benefits are reduced. Using a sample of married couples with both partners aged 50–65, we find that the proposed reform increases the labour supply of middle-income men whereas the effects on women are weaker. However, somehow surprisingly, we find that these reforms have an increasing effect on unemployment/inactivity probabilities which in turn is outweighed by a decreasing effect on the retirement probabilities in case of women. These findings emphasize the importance of a joint consideration of labour supply and retirement behaviour of married couples when introducing pension reforms and tax-benefit policies.     

Labour mobility during transitionEvidence from Georgia1

This article deals with labour mobility in Georgia during economic transition. We use quarterly 1998–99 panel data to examine mobility across six labour market statuses (inactivity, unemployment, formal wage employment, informal wage employment, self‐employment and farming). Our findings are consistent with the hypothesis of labour market segmentation. Formal employment is preferred to informal employment. Unemployment is largely a queuing device for individuals with higher education waiting for formal jobs. Some self‐employment is subsistence activities and consistent with a segmented labour market, while other is high risk and potentially high return activities. Age, gender and education are significant determinants of labour mobility. Finally, informal employment serves as a buffer in times of recession – with farming and informal wage employment absorbing labour shed by other statuses during the Russian financial crisis.     

Labour market institutions and wage setting: evidence for OECD countries

The main channel through which labour market institutions are supposed to work in affecting unemployment is through their effects on the key parameters of the wage curve. In particular, labour market institutions may have both a direct wage push (or level) effect, i.e. change the level of the real wage for any given level of the unemployment rate and productivity, and an indirect slope effect, i.e. change the responsiveness of the real wage to the unemployment rate. The question this article addresses is whether there is any evidence that these transmission mechanisms were at work in a group of 20 Organization for Economic Co-operation and Development (OECD) countries over the period 1960 to 1999. The analysis is accomplished in two steps. Pooled Mean Group (PMG) estimates of a wage equation including unemployment, productivity and a set of wage push institutions are first obtained, allowing only a subset of institutional coefficient to be homogeneous, while leaving the unemployment and other coefficients free to differ across countries. The country specific estimates of the unemployment coefficients are then used to investigate whether and to what extent cross-country heterogeneity in the estimated wage response to unemployment is related to institutional differences. The results support the existence of significant wage push effects of union density and benefit replacement rates, and of significant slope effects of benefit replacement rates, benefit duration and employment protection. A more generous unemployment benefit structure is found to lower the wage responsiveness to unemployment, while higher employment protection, contrary to what one expects, is found to enhance it. No significant level and slope effects are found for the tax wedge and bargaining coordination.     

Evidence of the added-worker and discouraged-worker effects in Australia

Gross flow data for workers moving between the states of employment, unemployment and non-participation in Australia can be used to analyse the likelihood of workers transitioning between the three states in different phases of the business cycle. We use correlation analysis and a SVAR model to determine the cyclicality of state transition rates and use these results to characterise labour force inflows and outflows as being consistent in aggregate with either the discouraged-worker effect (DWE) or the added-worker effect (AWE). We find evidence that the AWE is dominant in transitions in both directions between unemployment and non-participation which contributes to a rise in unemployment during economic contractions. We also find that the DWE is dominant in transitions from non-participation to employment and that this drives the overall result that non-participation rises during a contraction. This means that the overall participation rate is procyclical. It is important to understand the cyclical influences on labour force participation and its interaction with unemployment before framing policy responses which seek to reduce labour market slack.     

Wage Determination In Australia*

This paper examines whether a stable expectations-augmented Phillips curve exists for Australia. High real wages in the face of continuing high unemployment over the past decade have led to suggestions that the level of unemployment has little effect on wage determination, with the bargaining process taking place between employers and those employees in ‘secure employment’. Results from aggregate data suggest that the level of unemployment is relevant to wage determination. In addition, the impact of overtime on the growth in money wages is consistent with the view that those in secure employment are influenced by labour market conditions.     

Equilibrium unemployment, search behaviour and unemployment persistency

Unemployment persistency and high equilibrium unemployment isoften assumed to be caused by rigidities and low search efficiencyin the labour market, especially in European welfare stateswith generous income replacement schemes. These arguments aretested on data from Sweden, an old welfare state with a longperiod of full employment that has changed into a situationwith high unemployment. Data show a clear and very strong unemploymentduration dependency, but it is not possible to prove that thisis a result of low employability among the long-term unemployed.Getting a job is most of all associated with relative qualifications,recall expectations and local labour market conditions, andnot with search behaviour or high wage demands. It is arguedthat unemployment duration when unemployment is high can bestbe understood as a selection process rather than a search process,and that econometric estimations of equilibrium unemploymentare too pessimistic about the potential for an expansive economicpolicy. It is also argued that an active labour market policyis a more efficient compliment to such a policy than changesin income replacement ratios.     

Wage and Mobility Effects of Trade and Migration on the Austrian Labour Market

This study analyses the effect of trade and migration on wages and labour marketmobility. We estimate wage growth equations and a multinomial logit mobilityequation on an individual data set ranging from 1991 to 1994. We find substantialdifferences in the reactions of white and blue-collar workers wages and mobilityto trade and migration. In Austria exports have a positive and imports a negativeimpact on wage growth only for blue-collar workers. Migrants also reduce onlyblue-collar workers wage growth. Our results indicate that higher imports and aninflow of migrants reduce sectoral mobility of all types workers. The risk of beingout of work by contrast is increased by migration and imports only for blue-collarworkers, but reduced by exports for all types of workers. In general our results suggestenlargement of the EU would have only small effects on the Austrian labour market.     

Unemployment,long-term employment relations and the determination of unit labour cost growth in US manufacturing industries

This paper examines the effect that unemployment and long-term employment relations exert on the determination of unit labour costs. The paper proceeds in three sections. Section one analyses the relationship between labour market conditions and unit labour costs by developping a simple model of a firm that relies upon dismissal threats to elicit work effort. The comparative static properties of this model suggest that a tightening of labour markets may result in an increase in unit labour costs. In addition, it is argued that the labour market disequilibrium that occurs at full employment levels of unemployment will likely result in an increase in the growth rate of unit labour costs. The second section of the paper reviews diverse theories of long-term employment relations (LTERs), each of which suggest that the presence of LTERs ought to reduce the effect that labour market conditions exert on unit labour costs. The third section of the paper presents empirical estimates of the effect unemployment and LTERs exert on unit labour costs. The central empirical findings can be briefly summarized. First, movements towards full employment increase the growth rate of wages, reduce the growth rate of labour productivity and increase the growth rate of unit labour costs. Secondly, where long-term employment relations are prevalent, the effect of unemployment on wage, labour productivity, and unit labour cost growth is diminished. The paper concludes by discussing the implications these findings have for effort regulation models and the macroeconomic foundations of microeconomic labour market structures     

International fragmentation: Boon or bane for domestic employment?

In this paper, we introduce the fairness approach to efficiency wages into a standard model of international fragmentation. This gives us a theoretical framework in which wage inequality and unemployment rates are co-determined and therefore the public concern can be addressed that international fragmentation and outsourcing to low wage countries lead to domestic job-losses. We develop a novel diagrammatic tool to illustrate the main labour market effects of international fragmentation. We also explore how preferences for fair wages and the size of unemployment benefits govern the employment effects of outsourcing and critically assess the role of political intervention that aims to reduce unemployment benefits under internationally fragmented production.     

Career, experience and returns to human capital: is the dual labour market hypothesis relevant for the UK?

This paper investigates the relationship between career status, labour market experience and returns to human capital accumulation in the context of a two-tier, career and non-career labour market. Using micro data from the British Household Panel Survey (BHPS), this study detects wage and employment mechanisms that differ between these two tiers of workers. The paper finds no support for the hypothesis of strict duality, by which the returns to education are expected to differ across labour market segments, with the returns in career employment being high and positive and the returns in the non-career sector being close to zero. The paper, however, finds support for significant returns to current tenure only in the career sector and also for the scarring hypothesis, according to which part-time employment and unemployment experience have a negative effect on participation and earnings in the career sector. Finally, there is evidence that only non-career earnings are significantly affected by local demand conditions, in contrast to earnings in the career sector. Career status is modelled as an endogenous variable subject to an initial job choice.     

The role of unemployment in wage determination: further evidence on the wage curve from Turkey

This paper presents an empirical estimation of the correlation between wages and regional unemployment rates in Turkey, more specifically it explores the role of regional unemployment rates in wage determination. The analysis builds upon a series of recent empirical studies on the wage-unemployment relationship, now commonly known as ‘the wage curve’, a downward sloping curve in wage-unemployment space. The existing studies are for most part in advanced market economies, while this paper presents one of the few attempts at a wage curve analysis within the context of a developing market economy. A cross-sectional estimation of micro level individual wage data for the Turkish labour market in 1994, suggest a statistically significant negative correlation between wages and regional unemployment rates. Separate regressions for men and women, however, show a wage curve to exist only in the male labour market. The study also presents the results on other variables of wage determination such as returns to schooling, returns to age, job tenure, gender, industrial and occupational affiliation of the worker, economic sector and union status.     

Policy Influences on Unemployment: the European Experience

This paper considers the implications of four kinds of labour market policies for the 1980s rise in European unemployment: unemployment compensation, active labour market policies, employment protection legislation and taxation. It finds evidence that all have played a role in the determination of unemployment and discusses the mechanisms involved, the extent of the influence of each and the lessons learned from this experience. One of the main findings is that there is a trade‐off between wage inequality and unemployment. Policy has played a role in determining how a country responded to the negative macroeconomic shocks of the 1980s but policy alone cannot explain the full rise in European unemployment and North American wage inequality.     

An explorative empirical analysis of the influence of labour flows on wage formation

This study presents an explorative econometric analysis of the influence of labour market flows on wage formation. It applies the vector cointegration and common trends methodology of Johansen (Likelihood-based Inference in Cointegrated Vector Autoregresssive Models, OUP, Oxford, 1995). According to this approach, a combination of the flow of layoffs (flow from employment to unemployment) and the flow of filled vacancies (successful matches) appears to be an adequate alternative to the unemployment rate as indicator of labour market tightness in the wage equation for The Netherlands.     

Analysis of wage flexibility across the Euro Area: evidence from the process of convergence of the labour income share ratio

This article analyses wage flexibility as a factor in the unemployment rate across 12 Euro Area countries. We use extensive evidence pertaining to the countercyclical behaviour of the labour income share ratio to estimate its equilibrium value in the long run. This measure is calculated using a hybrid New Keynesian Phillips curve. Additionally, by using spatial econometrics, we can incorporate into the study the interdependence in the inflation among the countries. As a result, we identify countries that might see an improvement in their employment rates by improving their wage flexibility. We also identify countries with high unemployment that is not a consequence of a lack of wage flexibility.     

A New Specification of Labour Supply in the MONASH Model with an Illustrative Application

MONASH is a dynamic general equilibrium model of the Australian economy. This article describes a new labour-market specification for MONASH in which people are allocated in year t to categories according to their labourmarket activities in year t – 1. People in each category plan their labour supplies by solving an optimisation problem. Via these problems, we introduce the assumption that people in employment categories supply labour more strongly to employment activities than do people in unemployment categories. Thus we find that employment-stimulating policies in t – 1 increase labour supply in t by shifting the composition of the labour force in t in favour of employment categories and away from unemployment categories. We illustrate this idea by using MONASH to simulate the Dawkins proposal to combine a freeze on award wage rates with tax credits for low-wage workers in low-income families. We find that the Dawkins policy would generate a significant short-run increase in employment. With the increase in employment generating an increase in labour supply, the employment benefits of the policy would persist over many years. However, in the long run, we would expect the effect of the policy on aggregate employment to be small and to depend on how the policy affected the ratio of real after-tax wage rates to unemployment benefits.     

Effects of collective minimum wages on youth employment in Austria

This paper analyzes the impact of collective minimum wages on youth employment for 14 sectors of the Austrian economy, taking into account the possibility of nonlinearity. We find that when the real index of minimum wage rises above a certain point, negative employment effects for young individuals (aged between 19 and 25 years) can be expected in Austria. In five of seven market sectors the minimum wage lies above the optimal level that maximizes the employment of young workers.     

Regional unemployment and its persistence in transition countries1

We look at the differences in regional unemployment rates in six major transition countries and their persistence over time. We analyse the role various adjustment mechanisms play. While movement out of the labour force seems to be one consequence in many regions with high relative unemployment, there are also signs of emerging wage flexibility. Employment creation, by contrast, has not picked up in regions of high unemployment. Labour mobility also remains very limited in size although it appears to respond to basic economic incentives. Policies addressing housing market imperfections and information asymmetries are necessary to increase worker mobility and to integrate better national labour markets.     

The effect of shocks to labour market flows on unemployment and participation rates

This article presents an analysis of labour market dynamics, in particular of flows in the labour market and how they interact and affect the evolution of unemployment rates and participation rates, the two main indicators of labour market performance. Our analysis has two special features. First, apart from the two labour market states – employment and unemployment – we consider a third state – out of the labour force. Second, we study net rather than gross flows, where net refers to the balance of flows between any two labour market states. Distinguishing a third state is important because the labour market flows to and from that state are quantitatively important. Focusing on net flows simplifies the complexity of interactions between the flows and allows us to perform a dynamic analysis in a structural vector-autoregression framework. We find that a shock to the net flow from unemployment to employment drives the unemployment rate and the participation rate in opposite directions while a shock to the net flow from not in the labour force to unemployment drives the rates in the same direction.