The effect of globalization on union bargaining and price-cost margins of firms

In recent years, Europe has witnessed an accelerated process of economic integration. This paper analyzes how increased economic integration has affected labor and product markets. We use a panel of Belgian manufacturing firms to estimate price-cost margins and union bargaining power and show how various measures of globalization affect them. Import competition puts pressure on both markups and union bargaining power, especially when there is increased competition from low wage countries. This suggests that increased globalization is associated with a moderation of wage claims in unionized countries, which should be associated with positive effects on employment.

Fiscal Leadership and Coordination in the EMU

We analyze the role of fiscal-monetary policy interactions and fiscal coordination in EMU under the assumption of strategic wage setting in unionized labour markets. We find that production subsidies and real wage distortions are strategic complements. The literature on macroeconomic stabilisation policies and policy games usually neglects this point and reaches overoptimistic conclusions about the desirable effects of accommodating fiscal policies. Central bank preferences also affect the desirability of fiscal coordination in a monetary union. In fact, contrary to Beetsma and Bovenberg (1998), we find that fiscal coordination improves outcomes in the case of a conservative central banker, whereas it leads to worse outcomes with a populist one.

Monetary Policy in Illiquid Markets: Options for a Small Open Economy

Two impediments to effective monetary policy operation include illiquidity in bond markets and the zero bound of interest rates. Under these conditions alternative means of enacting monetary policy may be required. This paper empirically explores policy options implemented through equity and currency markets that will generate similar inflation responses at different time horizons. In terms of GDP loss the least costly means of achieving a particular long run inflation outcome is via the current monetary policy arrangements. Currency market alternatives are volatile but less expensive than the equity market in terms of output loss for short term inflation horizons.

On the Equality of Real Interest Rates Across Borders in Integrated Capital Markets

The purpose in this note is first to review briefly the empirical results on the relationship between real interest rates and real exchange rates; this empirical literature provides little support for the hypothesis of Roll that expected real interest rates are equal in general. Our second aim is to discuss the theoretical conditions that have to be met for his hypothesis to hold.

The takeover and selection effects of foreign-owned establishments: an analysis using linked employer–employee data

We provide the first estimates of the effect of foreign ownership on wages in Germany, controlling for the observed and unobserved characteristics of workers and plants. We also test whether the wage gains from joining a foreign-owned firm are subsequently lost when leaving that firm, and we examine whether wage gains vary across the sample. We find large selection effects in terms of worker and plant components of wages. Once the selection effect is taken into account, the takeover effect is small and in some cases insignificantly different from zero.

Non-Keynesian Fiscal Adjustments? A Close Look at Expansionary Fiscal Consolidations in the EU

This paper analyses the characteristics of episodes of fiscal consolidation in the EU exhibiting non-Keynesian features, i.e., followed by an improved growth performance. Roughly half of the episodes of fiscal consolidations that have been undertaken in the EU in the last 30 years have been followed by higher growth. Probit regressions indicate that the consolidations that turned out to be expansionary were more likely started in periods with output below potential and based on expenditure cuts rather than on tax increases. These results appear quite robust with respect to the criteria used to identify the consolidation episodes and to classify such episodes as expansionary.

The Impact of Racial Discrimination on the Early Career Outcomes of Young Men

The NLSY dataset is utilized to measure the extent of employer wage discrimination between white and black males during their first 5 years of post-school employment. We look at the respondent’s first job and the jobs 1 and 5 years after school completion. Oaxaca wage decompositions are employed to gauge the effect of discrimination. Consistent with our hypothesis, we find that the discrimination component of the wage gap falls over time. For the first job out of school the unexplained wage gap between blacks and whites is 35%. By year 5, the unexplained component falls to about 13%. Thus, while discrimination continues to play a role in explaining the white–black wage gap over time, its impact decreases as time in the labor market increases.

Wage vs. industry subsidies: coping with technology related unemployment in a globalized economy

In the past, economic policy has largely adopted a sectoral approach to technology-related unemployment. More recently though, wage subsidies have gained attention as an alternative means of reemployment, with the dispute on how best to cope with unemployment still unsettled. However, despite the fact that results may differ, research mostly assumed a closed-economy setting. Based on a HOS model with factor-augmenting technical change and labor-market rigidities, the paper examines the differences of these two subsidization schemes on output and employment. Since both schemes work through different channels, namely the demand versus the supply side, effects differ not only in magnitude. The paper includes a comparative calibration exercise for the case of Germany.

Currency Unions: Some Lessons from the Euro-Zone

Whilst there are many sizeable benefits from currency union, the main disadvantage is often the difficulty of adjusting to an asymmetric shock. Such adjustment is easier when the separate countries (regions) in such a union have flexible labour markets, and when there is a federal fiscal system to ease the adjustment process. The euro-zone has neither. We show that the trends in relative unit labour costs have in several recent cases been worsening relative competitiveness, thereby putting the euro-zone under greater centrifugal pressure. Nevertheless the costs of ‘exit’ are so high that it would only probably occur as a consequence of political mis-calculation.

Black–White Wage Differentials in a Multiple Sample Selection Bias Model

This paper simultaneously incorporates two sources of selection bias in the black-white wage equations. It demonstrates that the biases due to an individual’s propensity to be in the labor force and the firm’s hiring practices are important in determining the black–white wage differential and failure to account for both biases will result in inaccurate estimation of the black–white wage differential. We found that adjusting for double selection bias in the wage equation, the black–white female wage gap is 26% larger than the black–white male wage gap, and 12.1% larger when we adjust for a single selection bias. The results seem to suggest that at the macro level, the enforcement of policies related to racial issues in the labor market will likely lead to a reduction in the black–white wage gap.

Relative Responsiveness of Bargaining Solutions to Changes in Status-quo Payoffs

It is a well-known fact that several prominent bargaining solutions are responsive to changes in status-quo (i.e., disagreement or fallback) payoffs. When an agent’s status-quo payoff increases, his solution payoff either stays the same or increases. A fully general result for these solutions’ status-quo point ranking is impossible to establish. In this paper, using an important class of bargaining problems, a ranking of the relative status-quo point responsiveness of prominent bargaining solutions is obtained. Using the Constant Elasticity of Substitution class of bargaining problems, regardless of the concavity of the Pareto frontier and the level of increase in one’s status-quo payoff, we find the equal gains solution is the most responsive with respect to changes in status-quo payoffs, followed by the Nash solution. The equal sacrifice solutions is the least responsive, followed by the Kalai/Smorodinsky solution.

Optimal Taxes and Tariffs with Private Information

The implications of private information regarding a worker’s skills for optimal tax policy in an open economy are explored. Two cases are considered. In one general skills are private information and in the other sector-specific skills are private information. It is shown that for a small open economy tariffs and other equivalent trade distortions are not part of the optimal tax policy in either case. In both cases the optimal policy distorts the labor–leisure choice but only in the case of sector-specific skills as private information are labor allocation decisions distorted. For a large country, distortions that are equivalent to the standard optimal tariff formula characterize the optimal tax policy.

Revenue Effects of Tax Facilities for Pension Savings

Many countries have tax facilities for pension savings. These facilities are often associated with the application of the cash-flow treatment of pensions: pension contributions are tax-exempt, capital income of pension funds is tax-exempt, and pension benefits are taxed, but usually at a relatively low rate. This paper investigates the revenue effects of a cash-flow tax regime for pension savings by full present-value calculations. A comprehensive income tax system is used as a benchmark. We present an empirical analysis for the Netherlands as a typical example of a country with funded pensions. Our calculations show that current taxation of pensions implies a major tax revenue loss. For the year 2003, we estimate a fiscal pension subsidy of 1.4% to 1.5% of Gross Domestic Product (GDP).

Input–Output and General Equilibrium Models for Hull and Humber Region in England

This paper shows how one can construct an input output table for four Humber sub regions in England with information on levels and share of employment and output provided by the Humber Forum using coefficients from the national input–output table of UK. It then illustrates how these can be applied to construct multisectoral general equilibrium models specific to Hull, East Riding, North Lincolnshire and North East Lincolnshire regions situated in two sides of Humber estuary and a regional model that takes these four inter-dependent economies constituting the Humber economy. A dynamic model is constructed for Hull to assess the prospects in next hundred years based on micro consistent dataset in which households and firms are assumed to have perfect foresight in making their consumption and production decisions. These models are then applied to evaluate impacts of tax policies that can distort relative prices of commodities and factors of production and thus can distort the efficient allocation of scarce economic resources and on welfare of households in the Humber region. To my knowledge this is the first study of this type for this region.

Non-traded Goods,Technical Progress and Wages

We use a general equilibrium model of trade to show that technical improvement may indeed cause a fall in the wages of unskilled workers. Under some modest conditions, the wages of skilled workers may go down too.

Is Uniform Money Always Better than Separate Monies?

Previous studies that compare a uniform money with separate monies used models in which money is the only asset and in which individuals hold either zero or one unit of money. Here, the comparison is made using a model in which money coexists with a higher-return asset and in which individuals are permitted to hold richer portfolios of assets. The results show that a general conclusion is not possible. A uniform money has a higher expected utility than do separate monies in many examples. However, when the discount on bonds and uncertainty about the nationality of the trading partner are sufficiently high, then there are examples in which separate monies are better.

Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?

The accumulation of international reserves by emerging markets raises the question of how to best utilize these funds. This paper explores two routes through which the pooling of reserves could enhance stability and welfare. First, the reserve pool could be used for emergency lending in response to sudden stops. Second, a portion of the reserve pool along with borrowed funds could be used to purchase contingent debt securities issued by governments and corporations, helping to solve the first-mover problem that limits the liquidity of markets in these instruments and hinders their acceptance by private investors. This paper argues that the second option is more likely to be feasible and productive.

Can the HOSS framework help shed light on the simultaneous growth of inequality and informalization in developing countries?

Using simple, modified versions of the factor proportions framework, and focusing on structural features within developing economies, this paper attempts to reconcile puzzling developments observed in many post-reform, post-liberalization countries whereby increasing income inequality has emerged side-by-side with informalization of the economy. Measures undertaken to enhance public sector efficiency and attract investment in an import-intensive export sector may increase rental–wage and skilled–unskilled wage gaps, contra the predictions of the simple Heckscher–Ohlin–Stolper–Samuelson (HOSS) framework regarding skill- and capital-scarce countries. The common thread generating our interesting results is the presence of sectors that are even more labor-intensive than those producing traded goods.

Evaluating China’s Integration in World Trade with a Gravity Model Based Benchmark

This paper assesses China’s “natural” place in the world economy with a new set of trade integration indicators, which are used as a benchmark in order to examine whether China’s share in international trade is consistent with fundamentals such as economic size, location and other relevant factors. They constitute a better measure of trade integration that incorporates many more factors than traditional openness ratios. The model tracks international trade well and confirms that China is already well integrated in world markets, particularly with North America, several Latin American and East Asian emerging markets and most euro area countries.