How flexible are real wages in EU countries? A panel investigation

We estimate the degree of real wage flexibility in 19 EU countries in a wage Phillips curve panel framework. We find evidence for a reaction of wage growth to unemployment and productivity growth. The degree of real wage flexibility tends to be larger in the central and eastern European (CEE) countries than in the euro area; weaker in downturns than during upswings. There exists an inflation threshold, below which real wage flexibility is low. We also find that a part of the heterogeneity in real wage flexibility and unemployment may be related to differences in the wage bargaining institutions.     

Exploring different measures of wage flexibility in a developing economy context: the case for Turkey

In this paper we use Turkish household labor force data to address a number of conceptual issues pertaining to the wage curve, an empirically derived negative relationship between the real wage level and the local unemployment rate. First, we show that in developing economies where labor markets are prone to high degree of segmentation by skill level, local unemployment rates disaggregated by education provide more accurate measures of the degree of group-specific wage competition and hence yield more robust results of the wage curve analyses. Second, we estimate the wage curve using various definitions of the unemployment rate, including discouraged and marginally attached workers, and the long-term unemployment rate to explore the most relevant measure of local labor market tension in the wage setting process. We find that broader definitions of unemployment serve as a more effective reference point in measuring wage flexibility for women, whose attachment to the labor market is substantially weak in the Turkish context; while for men the official and long-term unemployment rates perform well. Finally, using quantile regression we show that wage responsiveness to unemployment cannot be assumed to be constant along the wage distribution. In the Turkish case, we find a higher unemployment elasticity of wages around the median segment of wage distribution. This effect is more pronounced for women.     

Labour market outliers: Lessons from Portugal and Spain

Spain has the highest unemployment rate (22.2%) of any European Union country, Portugal one of the lowest (7.3%). Superficially, these countries share many labour market features: the toughest job security rules in the OECD, an apparently similar architecture of wage bargaining, and comparable generosity of their unemployment insurance systems, at least since 1989. We address the puzzle by examining Portuguese and Spanish labour market institutions, in particular job security, unemployment benefits and the system of wage bargaining. We then conduct empirical analysis of Spanish and Portuguese unemployment outflows and wage distributions, using micro data. We find differences in unemployment benefits (non-existent in Portugal until 1985, and less generous nowadays), differences in wage flexibility (wage floors by category established by collective agreements are set at a lower relative level in Portugal), and, in practice, higher firing costs in Spain. A key explanation of the difference in Portuguese and Spanish unemployment rates is the wage adjustment process. Generous benefit levels may have been necessary for the path Spanish unions took, but this was not the sole explanation of different wage setting in Spain and Portugal.     

Migration and imperfect labor markets: Theory and cross-country evidence from Denmark,Germany and the UK

We investigate the labor market effects of immigration in Denmark, Germany and the UK, three countries which are characterized by considerable differences in labor market institutions and welfare states. Institutions such as collective bargaining, minimum wages, employment protection and unemployment benefits affect the way in which wages respond to labor supply shocks, and, hence, the labor market effects of immigration. We employ a wage-setting approach which assumes that wages decline with the unemployment rate, albeit imperfectly. We find that the wage and employment effects of immigration depend on wage flexibility and the composition of the labor supply shock. In Germany immigration involves only moderate wage, but large unemployment effects, since immigrants are concentrated in labor market segments with low wage flexibility. The reverse is true for the UK and Denmark.     

Has the EMU reduced wage growth and unemployment? Testing a model of trade union behavior

Grüner (2010) argues that the introduction of the European Monetary Union (EMU) led to lower wage growth and lower unemployment in participating countries. According to Grüner, monetary centralization increases the amplitude of national business cycles, which leads to higher unemployment risk. In order to counter-balance this effect, trade unions lower their claims for wage mark-ups, resulting in lower wage growth and lower unemployment. This paper uses macroeconomic data on OECD countries and a difference-in-differences approach to empirically test the implications of this model. Although we come up with some weak evidence for increased business cycle amplitudes within the EMU, we neither find a significant general effect of the EMU on wage growth nor on unemployment.     

Trade, technology, and unemployment: the role of endogenous skill formation

Abstract .  This paper analyses trade in an asymmetric  2 × 2 × 2  world, where the two countries ('Europe' and 'America') differ in their preferences towards wage inequality. Fair wage considerations compress wage differentials in both countries. European workers are more averse to wage inequality, and Europe is characterized by lower wage differentials and higher unemployment. Allowing for endogenous skill formation, the effects of a globalization shock, global technological change, and a change in the educational capital stock on skill premia and employment levels are derived. In contrast to a model with exogenous factor supplies, international wage and unemployment differentials are affected by global shocks.     

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.     

EMPLOYMENT PROTECTION AND THE NON‐LINEAR RELATIONSHIP BETWEEN THE WAGE‐PRODUCTIVITY GAP AND UNEMPLOYMENT

This paper studies the relationship between the wage‐productivity gap and the unemployment rate in OECD countries between 1985 and 2007. In particular, we investigate whether differences in the employment protection across countries affect the link between these two variables. We show that the elasticity of unemployment with respect to the wage‐productivity gap is non‐linear and that it switches from a positive to a negative value with stricter employment legislation. From a theoretical point of view, we argue that this result is related to a set of labor market reforms introduced in many OECD countries, which affected the relative strictness of institutions.     

Price and quantity adjustments in the Austrian labour market

Austria is among the very few countries in the European Union which have managed to maintain comparatively low unemployment rates and high employment rates. This study looks at the price and quantity adjustment mechanisms in the Austrian labour market which may have contributed to this favourable outcome. After reviewing briefly the basic theoretical reasoning an empirical investigation is began into gross flow dynamics in the labour market and the cyclical volatility of employment and unemployment in Austria. In international comparison Austrian unemployment is very stable over the business cycle. This is due mainly to the high sensitivity of the labour force on cyclical conditions and, partly, also on the relatively weak responsiveness of employment to cyclical fluctuations in output, the latter being possibly attributable to the high degree of real wage flexibility in Austria. The study proceeds to show that the long-run elasticity of wages with respect to unemployment is indeed quite high in Austria. However, evidence was also found for outsider effects in the Austrian wage setting process. Relative wage structures, on the other hand, appear to be rather rigid.     

The Brazilian wage curve: new evidence from the National Household Survey

This paper reconsiders the Brazilian wage curve using individual data from the National Household Survey at 27 Federative Units over the period 2002–2009. We find evidence in favor of the Brazilian wage curve with an unemployment elasticity of ?0.08. We also find that males in Brazil are significantly more responsive to local unemployment rates (?0.13) than their female counterparts. In fact, we find that the unemployment elasticity for women is statistically insignificant. Applying gender-specific unemployment rates, the elasticity for men decreases to ?0.09, while the elasticity for women remains statistically insignificant. This paper also finds that the estimates for Brazilian wage curve are completely different for the case of formal and informal workers.     

Political‐Economic Regime and the Wage Curve: Evidence from Chile, 1957–96

This paper tests whether a wage curve—a negative relationship between the level of unemployment and the level of pay—existed in Chile during 1957–96. The analysis is divided into two periods. For 1957–73, during inward‐led development, we reject the existence of a wage curve. For 1974–96, when the economy opened, state‐run industries were privatised and labour rights weakened, we find a wage curve of ?0.08. Based on this finding we conclude that the unemployment–pay elasticity in the post‐reform period is similar to the ?0.07 to ?0.10 wage curve found in other western, capitalist countries. Disaggregating the analysis by group, we find that women, non‐university educated workers and public sector workers have suffered more from unemployment. Yet informal sector workers have not experienced pay drops as a result of unemployment, contradicting the hypothesis that the informal sector acts as a buffer during economic downturns.     

Coordination versus flexibility in wage formation: a focus on the nominal wage impact of productivity in Germany,Greece, Ireland,Portugal, Spain and the United States

Wage coordination between countries of the European Monetary Union (EMU) aims at aligning nominal wage growth with labour productivity growth at the national level. We analyse the developments in Germany, the EMU’s periphery countries Greece, Ireland, Portugal and Spain along with the United States over the period 1980 to 2010. Apart from the contribution of productivity to nominal wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated nonlinear equation resulting from a wage bargaining model. We further study the downward rigidities of nominal wages. The findings show that in past times of low productivity, price inflation and reductions in unemployment still put significant upward pressure on nominal wage growth. The periphery countries are far from aligning nominal wage growth with productivity growth. German productivity is a major wage determinant, but surely not the only one. Within the context of a free bargaining process between employers and labour unions, policy-makers can effectively use the replacement rate to steer the nominal wages outcome.     

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.     

Measuring Structural Unemployment: NAWRU Estimates in the Nordic Countries

The non-accelerating wage rate of unemployment (NAWRU indicator), used by the OECD as a measure of structural unemployment, has risen for the four Nordic countries Denmark, Finland, Norway and Sweden. In this paper we present stable empirical wage equations for the same countries over the period 1964–1994, in sharp contrast to the increased NAWRU estimates. The instability of the NAWRU estimates is an artefact of a misspecified underlying wage equation, and not due to instability in wage setting itself.
JEL classification : E 24; E 31; E 64; J 51     

REVISITING THE REAL WAGES–UNEMPLOYMENT RELATIONSHIP. NEW RESULTS FROM NON-LINEAR MODELS

We examine the long-run real wages–unemployment relationship for five OECD countries over the period 1960:1–2001:4. Given the theoretical possibility of non-linear equilibrium due to downward real wage rigidity we employ econometric tests that allow for the presence of non-linearities in the long-run equilibrium. We adopt the notion of 'hidden co-integration' suggested by Granger and Yoon . This methodology has several advantages with respect to other non-linear models. We find statistical evidence that, in general, there is a long-run positive relation between real wages and unemployment only when both are affected by positive shocks. We also find a negative relationship between unemployment and productivity. The empirical analysis is complemented with the estimation of error correction models for all countries.     

UNEMPLOYMENT AND THE PRODUCTIVITY SLOWDOWN: AN EFFCIENCY WAGE PERSPECTIVE

Many OECD economies suffered a productivity slowdown beginning in the early 1970s. However, the increase in unemployment that followed this slowdown was more pronounced in European economies relative to the USA. In this paper we present an efficiency wage model, which enables us to identify two basic channels through which the productivity slowdown can affect workers' effort incentives. Predictions of the model are consistent with the different trends in unemployment across countries over this period in the face of a similar slowdown in productivity. We also demonstrate how the link between growth and unemployment depends upon labour market institutions in such a way that we can reconcile the mixed empirical results observed in the literature.     

Nonlinearities in the U.S. wage Phillips curve

We examine the relationship between wage inflation and the unemployment rate in the U.S. economy for the 1964–2014 period by means of a three-regime threshold regression model. The estimated threshold parameters suggest that this relationship changes when the unemployment rate transitions between regimes defined by 5.61% and 7.63%. During mild recessions and their subsequent recoveries, the time-varying estimates of the model indicate a negative relationship between both variables, consistent with the implications of a wage Phillips curve (WPC) derived from the standard New Keynesian model with staggered wage setting in Galí (2011). However, we find that this relationship breaks down during deep recessions and their recovery periods, which explains the difference between wage inflation predicted by standard New Keynesian models and the observed low wage growth in the aftermath of the ‘Great Recession’. This finding and the fact that statistical tests strongly favor our three-regime model suggest that linear and two-regime models are insufficient to account for all the variability in the relationship between wage inflation and unemployment.     

Local flexibility in wage setting: evidence from the Norwegian local public sector

The public sectors in the Scandinavian countries have been prominent examples of centralized wage-setting systems. In Norway, more room for local flexibility was implemented by a wage frame system introduced in 1990 in which the national wage scale system merely works like a minimum wage system. We analyze the effect of this reform using a unique database where we can track employees and their local government over time and explore the consequences of controlling for fixed individual effects and fixed employer effects. We find that the wage dispersion increased across local governments after 1990, and that wages to some extent became more responsive to local government income, monopsony power and other local government characteristics after the reform. However, the numerical effects of the reform are estimated to be quite small.     

An alternative measure of wage flexibility

Wage flexibility is usually defined as the responsiveness of wages to market disequilibrium. But market disequilibrium can be defined in different ways. One can accept a non-Walrasian definition of equilibrium, the market being in equilibrium when agents have no incentive to change their decisions, even if a change of wages can improve their position. To study the behavior of wages as an equilibrating variable, it is appropriate to consider Walrasian demand and supply functions, in which wages are allowed to move in each period in a direction to restore equilibrium between Walrasian demand and supply, even when agents experience restrictions and take notice of these restrictions when making decisions. The degree of wage flexibility is most often measured as the amount of equilibrating change that took place in a certain period. In most wage equations wage flexibility is measured by the coefficient of the unemployment variable, which links the equilibrating change in the wage variable to the degree of market disequilibrium. The equalization of market disequilibrium with unemployment poses some problems. The authors wish to thank Freddy Heylen of the University of Gent for helpful comments.