Labour market reform and the macroeconomic efficiency of the labour market in Australia

This paper assesses the effects of a decade and a half of labourmarket reform in Australia on labour market flexibility at themacroeconomic level. Increased labour market flexibility isinterpreted as reduced structural unemployment and enhancedefficiency of matching. We use shifts in the Beveridge Curveas a measure of changes in labour market efficiency (followingSolow, R., What is labour-market flexibility? What is it goodfor?, Keynes Lecture, British Academy, London, December, 1997).Time series analysis of unemployment, vacancies and other relevantvariables strongly suggests that changes in the efficiency oflabour market matching over the period reflect the cyclicaleffects of hysteresis rather than the effects of labour marketreform.     

Modelling labour market dynamics with on-the-job search

A flow model of the Dutch labour market is used to calculate the effects of policy options which aim to enhance employment, especially at the lower end of the labour market. The model distinguishes between good and bad jobs, allows for endogenous wage formation and job creation, and describes the flows between these jobs so that job-to-job mobility and the vacancy chain is made endogenous. In the matching process employed job seekers with bad jobs compete with short-term and long-term unemployed for the filling of vacancies for good jobs. In each period part of the good and bad jobs are destroyed which results in inflow into unemployment. The model explicitly describes the flow of unemployed through the various duration classes of unemployment and it allows for negative duration dependence so that the escape probability from unemployment for long-term unemployed is smaller than for short-term unemployed. The model is used to simulate the effects of external shocks, such as structural productivity shocks. An impulse response analysis using the model is also conducted considering labour market policies which aims especially to enhance employment at the lower end of the labour market. In particular, the effects are analysed of measures subsidising the opening of bad jobs (jobs at the lower end of the labour market) and a rise in the productivity of a bad job as compared to a good job which can be achieved by changes in the tax system.     

BUSINESS CYCLES IN THE EQUILIBRIUM MODEL OF LABOR MARKET SEARCH AND SELF‐INSURANCE*

I introduce risk‐aversion, labor‐leisure choice, capital, individual productivity shocks, and market incompleteness to the standard model of labor search and matching and investigate the model’s cyclical properties. I find that the model can generate the observed large volatility of unemployment and vacancies with a reasonable replacement rate of unemployment insurance benefits of 64%. Labor‐leisure choice plays a crucial role through additional utility from leisure when unemployed and further amplification from adjustments of hours worked. On the other hand, the borrowing constraint or individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies.     

PERSISTENCE AND VOLATILITY OF BEVERIDGE CYCLES

This article explains the cyclical behavior of the fluctuations in unemployment and vacancies by demand externalities. Adding such externalities to an otherwise standard search and matching model reduces the need for exogenous shocks in explaining these fluctuations. Under plausible parameter values, the equilibrium dynamics include a stable limit cycle that resembles the empirically observed counterclockwise cycles around the Beveridge curve. Calibrated to the duration of the business cycle, these endogenous “Beveridge cycles” are as persistent as the data, without losing any of the amplification of the standard model.     

The Unemployment-Vacancy Relationship in Australia

One of the most important features of the Australian economy in the past two decades has been the structural deterioration of labour market performance, reflected in both an increase in the average rate of unemployment and an outward shift in the Beveridge Curve, which depicts the relationship between unemployment and vacancies. This article attempts to uncover some of the causes for this structural deterioration, in terms of the factors affecting the UVrelationship. We find that the Beveridge Curve shifted out around 1974, consistent with an increase in the equilibrium rate of unemployment which is generally agreed to have occurred around that time. Using gross labour market flow data, we also investigate the determinants of the equilibrium Beveridge Curve in the 1980s. We find that the Beveridge Curve shifted further outwards in the 1980s. The most important determinant of this shift was the decline in the search effectiveness of the unemployed, reflected in the increasing incidence of long-term unemployment. Partially offsetting this influence during this time were the declining labour force participation of men, and the very large increases in female employment.     

Unemployment–inflation trade-offs in OECD countries

Inflation and unemployment reduce welfare of individuals and should be as low as possible in any economy. Cointegration and Granger causality tests suggest that there are long run relations between these two variables among the OECD economies. While rates of unemployment vary significantly among these economies, rates of inflation have stabilised at lower rates as a result of inflation targeting policies adopted in them during the last two decades. The Phillips curve phenomena are still empirically significant for 28 out of 35 of these OECD economies in country specific regressions; in fixed and random effect panel data models and in a panel VAR model for 1990:1 to 2014:4. Country specific supply curves and Okun curves are consistent to thin Phillips curve relations. Leftward shifts in the Beveridge and Phillips curves require labour market reforms balancing between job creations and destructions. Complementing macro stimulations by microeconomic structural and institutional reforms can bring efficiency in bargaining for wages and employment among firms and workers to make unemployment–inflation trade-offs more significant and relevant in these economies.     

A comparison of the Beveridge curve dynamics in Italy and USA

In this article, we investigate the Beveridge curve dynamics in the USA and Italy by means of a cointegrated structural VAR model. A simple economic model is introduced to motivate the identifying assumptions of the empirical analysis. A stable long-run relationship is found for both countries. In order to study the dynamic behaviour of the model, and to decompose unemployment and vacancy fluctuations, we identify three common stochastic trends. The empirical results suggest that there are some sources of hysteresis in unemployment in both countries. Transitory shocks are also identified to account for the short-run dynamics of the model. The approach allows us to detach the long-run from the short-run dynamics, in order to provide information on the cyclical and structural Beveridge curve.     

Shocks and rigidities as determinants of CEE labour markets’ performance

In this article, the impact of real wage, productivity, labour demand and supply shocks on eight Central and Eastern European (CEE) economies from 1996–2007 is analysed with a panel structural vector error correction model. A set of long‐run restrictions derived from the dynamic stochastic general equilibrium (DSGE) model is used to identify structural shocks, and fluctuations in foreign demand are controlled for. We find that the propagation of shocks on CEE labour markets resembles that found for OECD countries. Labour demand shocks emerge as the main determinant of employment and unemployment variability in the short‐to‐medium run, but wage rigidities were equally important for observed labour market performance, especially in Poland, Czech Republic and Lithuania. We associate these rigidities with collective bargaining, minimum wage, active labour market policies and employment protection legislation.     

Sector-specific productivity shocks in a matching model

Endogenous separation matching models have the shortcoming that they are barely able to replicate the Beveridge curve (i.e. the negative correlation between unemployment and vacancies) and business cycle statistics jointly. This paper builds upon the sectoral shock literature and combines its insights with the standard endogenous separation matching approach. We show that the endogenous matching model with sectoral shocks can generate an aggregate Beveridge curve and performs reasonably well in explaining business cycle facts, especially compared to the one-sector baseline model.     

The importance of firing costs and the Hosios condition in search models with endogenous job destruction

We construct a DSGE search model with endogenous job destruction, incorporating wage rigidities, firing costs and unemployment benefit. We investigate the most important factors in matching the model’s cyclical properties with empirical data, particularly those of job creation rates (JCR) and job destruction rates (JDR). Firing costs assist significantly in explaining the procyclicality of JCR, the negative correlation of JCR and JDR, and the persistence of vacancies. They also decrease the counter-cyclicality of job turnover. We also postulate that the Hosios condition helps explain the negative correlation of JCR and JDR and vacancies’ persistence. Varying wage rigidities and unemployment income, however, do not improve the results.     

MODELLING A REGIME‐SHIFTING BEVERIDGE CURVE

This paper offers new insights into Beveridge curve analysis by modelling the unemployment–vacancy rate relationship within a Markov regime‐switching environment in which the probabilities of curve‐shifting are determined endogenously by shift factors. Shift factors include structural factors such as labour market participation and net migration, while cyclical variables include GDP growth, the real rate of interest, and labour productivity. This approach enables us to estimate regime‐specific parameters and to assess the role played by these factors in influencing the transition probabilities of switching between regimes. Using New Zealand data, we show that increases in the participation rate have shifted the Beveridge curve inward, while increases in net migration have shifted the curve outward.     

Sensitivity of Job Destruction to Vintage and Tenure Effects

Matching models with endogenous job destruction typically deliver excessively volatile job destruction and moderate volatility of vacancies. In our model, vintage and tenure effects promote the creation of new matches that are temporarily more productive, while reducing the survival of temporarily less productive matches. This cleansing effect produces a counter‐cyclical inflow into unemployment, removes the strong response of job destruction to productivity shocks, and generates a downward‐sloping Beveridge curve, as in the data. The model also generates more volatility in vacancies, the job‐finding rate, and labor‐market tightness.     

Unemployment and deterioration of human capital

The paper deals with the deterioration of human capital during spells of unemployment. In our model the probability of leaving the unemployment pool decreases with the duration of unemployment. It can be shown that with a linear deterioration function and a simple distribution function for the reservation productivity of firms, unemployment duration is suitably described by a distribution of the Gompertz-Makeham type. In a numerical simulation it could be demonstrated that deterioration of human capital during unemployment affects the relation between vacancies and unemployment in a specific way: in the case of labour market slackness the steady-state Beveridge curve bends away markedly from the standard u-v-curve in an outward direction while in a situation of almost full employment the effects are negligible. For higher deterioration parameters the Beveridge curve may even be upward sloping in a situation of excess supply on the labour market, implying the existence of multiple equilibria. Empirical estimation of the distribution function with German labour market data 1984–1987 reveals that the multiple equilibrium case is likely to be relevant in reality.For valuable comments and suggestions I am grateful to W.Franz, A.Hamerle and an anonymous referee. Responsibility for remaining errors remains with the author.     

AGGREGATE LABOUR MARKET DYNAMICS IN HONG KONG

I specify a simple search and matching model of the labour market and estimate it on unemployment and vacancy data for Hong Kong over the period 2000–2010 using Bayesian methods. The model fits the data remarkably well. The estimation shows that productivity shocks are the main driver of fluctuations in the labour market, with cyclical movements in the separation rate playing only a subordinate role. The parameter estimates are broadly consistent with those found in the literature. To replicate the volatility of unemployment and vacancies, the model estimates require a high replacement ratio and a low bargaining power for workers, in addition to two extraneous sources of uncertainty. The estimates are robust to a relaxation of the prior information and small changes in the underlying model specification, which suggests that the data are informative and that the model is well specified. Overall, the Hong Kong labour market can be characterized by having a low degree of churning in normal times, but rapid firings and hirings in recessions and expansions.     

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.     

Factor complementarity and labour market dynamics

We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, two of the endogenous mechanisms of the model – factor complementarity and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, deep habits have a smaller but significant role as an endogenous mechanism. Third, capital-augmenting productivity, investment-specific and matching efficiency innovations explain large part of the variation in labour market variables.     

Sectoral shifts and unemployment persistence

This paper deals with possible explanations of unemployment persistence within a sectoral approach to the Austrian labour market. First the concept of unemployment persistence is specified in terms of the time series properties of the unemployment rate. Sectoral job gains and job losses form the labour market flows in this approach. The standard matching model is replaced then by a model of the competition between the unemployed and new entrants in the labour market for new jobs as an ‘adding up’ demand system of the AIDS type. The estimations of different system specifications indicate, that the sectoral structure of job gains plays a role in the competition mechanism between unemployed workers and new entrants.     

Economic migration and business cycles in a small open economy with matching frictions

With the free movement of labour in Europe, economic migration has become an important determinant of labour supply. Cyclical migration exceeds one percent of the population in many countries and affects (un)employment and wage setting. The main contribution of this paper is that it models migration as an endogenous decision in a search-and-matching framework, where labour market institutions play an important role. It shows that, contrary to typical beliefs, migration can amplify business cycles. After a positive shock to the economy, immigration increases the labour force and initially unemployment. The latter reduces a worker's outside option in wage negotiations, resulting in a lower wage increase than when there is no migration. With cheaper labour firms post more job vacancies, which increases the probability that unemployed workers find jobs and attracts new workers to immigrate. Attenuated response of wages and the stronger response of employment to shocks result in a flatter Phillips curve.     

The Beveridge curve and labour market dynamics in Turkey

This article investigates the dynamics of unemployment and vacancy rates in Turkey during the period 1951 to 2008 by means of a Beveridge Curve (BC). The time-series analysis of unemployment and vacancies as well as two other relevant labour market variables, real wages and real labour productivity, strongly suggests inefficiency in the Turkish labour market. A stable long-run relationship between unemployment rate and vacancy rate is found for Turkey, that is, the existence of a negatively sloped BC is verified. The estimated Turkish BC reflects the structural problems and lack of flexibility in the labour market. The modified BC with real wages and labour productivity reveals that labour productivity has no significant effect on unemployment rate whereas wages have positive and significant effects on the same variable.     

Labour market transitions and unemployment duration: Evidence from Bulgarian and Polish micro-data1

The segmentation of the labour market is one of the most striking characteristics of the transition process in Central and Eastern European countries. Not only do the young, unskilled workers and women face a high risk of unemployment, but joblessness also varies significantly geographically. This paper sheds some light on labour market segmentation in transition countries by analysing individual records of individuals registered at the labour offices of two Polish regions (Warsaw and Ciechanov and two Bulgarian regions (Sofia and Botevgrad) over the initial three to four years of the transition to a market economy. The empirical results confirm the existence of highly selective firing and hiring processes in the Polish and Bulgarian labour markets. Overall, unskilled or poorly educated workers have the highest probability of becoming unemployed and remaining without a job for a long period of time. We also analysed the determinants of unemployment duration across regions and over time using a piece-wise constant hazard model with multiple destinations, i.e. employment and exit from the labour force. The results suggest that the unemployed with a high education and previous experience in the private sector have a higher probability of getting a new job, especially in the more dynamic labour markets, while those without previous work experience tend to stay unemployed for a longer period of time and often leave the labour market. The econometric results also suggest that the reforms of the unemployment benefit systems have produced important effects on unemployment flows.