Redistribution and employment policies with endogenous unemployment

We study optimal redistribution policy in an economy with three types of unemployed persons: those unable to work, the voluntarily unemployed, and the involuntarily unemployed. Both voluntary and involuntary unemployment are endogenous. Voluntary unemployment arises because individuals have different preferences, while involuntary unemployment results from frictions in the labour market or from an efficiency wage. We consider the employment policies of a well-informed government when it can and cannot commit to its policies. The model is simple, yet rich enough to reflect real-world policies, including transfers to the disabled, welfare for non-working employables, unemployment insurance, employment subsidies, and taxes on workers and firms.     

FIRM HETEROGENEITY AND THE LABOR MARKET EFFECTS OF TRADE LIBERALIZATION*

This article develops a model that incorporates workers' fair wage preferences into a general equilibrium framework with heterogeneous firms. In a setting where the wage considered to be fair by workers depends on the productivity of the firm they are working in, we study the determinants of profits, involuntary unemployment and within‐group wage inequality. We use this model to investigate the effects of globalization, thereby pointing to distributional conflicts that have so far not been accounted for: a simultaneous increase of average profits and involuntary unemployment as well as a surge in within‐group wage inequality.     

Subsidy competition and imperfect labor markets

This study presents a two‐country model of subsidy competition for manufacturing firms under labor market imperfections. Because subsidies affect the distribution of firms, subsidies influence unemployment rates and welfare in both countries. We show that when labor market frictions are high, subsidy competition is beneficial, although subsidies under subsidy competition are inefficiently high. In the coordinated equilibrium, the supranational authority provides a subsidy to firms that equal the expected total search costs, which increases the number of firms relative to laissez‐faire and improves welfare relative to laissez‐faire and subsidy competition. Finally, we find that a rise in a country's labor market frictions raises the equilibrium subsidy rate, affects unemployment rates, and lowers welfare.     

A new model of equilibrium involuntary unemployment

Summary. We show that equilibrium involuntary unemployment emerges in a multi-stage game model where all market power resides with firms, on both the labour and the output market. Firms decide wages, employment, output and prices, and under constant returns there exists a continuum of subgame perfect Nash equilibria involving unemployment and positive profits. A firm does not undercut the equilibrium wage since then high wage firms would attract its workers, thus forcing the undercutting firm out of both markets. Full employment equilibria are payoff dominated by unemployment equilibria, and the arguments are robust to decreasing returns.Received: 21 May 2001, Revised: 15 April 2003, JEL Classification Numbers: D43, E24.Correspondence to: Leo KaasWe thank an anonymous referee, Woojin Lee, Klaus Ritzberger and seminar participants in Konstanz, Manchester, Milan, Prague, Vienna, and Warwick for helpful comments. Financial support from the Economic and Social Research Council (UK) under grant L138251030 and from the Manchester School Visiting Fellowship Scheme is gratefully acknowledged.     

Involuntary unemployment: the missing piece in Keynes's General Theory *

Using a retrospective methodology, my paper examines critically the insights on involuntary unemployment offered by Keynes in his General Theory. Keynes, it is argued, gave involuntary unemployment a modern micro-founded definition yet — quite opportunely, in view of the difficulty of the task—did not attempt to provide a direct microeconomic explanation of it Rather, his claim to the demonstration of its existence rests on an indirect argument, where involuntary unemployment emerges at the corollary of effective demand falling short of its full employment level. This justification is based on the more or less tacit assumption that involuntary unemployment and effective demand-deficiency are equivalent. This claim of equivalence, it will be argued, is wanting. Hence the view that involuntary unemployment may have been demonstrated through the proxy of demand-deficiency falls. My paper evaluates whether Keynes's other arguments in favour of involuntary unemployment are robust. Several alternative interpretations of his General TheoryChapter Two ‘fundamental observation’, focusing respectively on money illusion, adjustment flaws, and resistance to cuts in nominal wages, are discussed. Here also the verdict will be negative. The general conclusion then follows that no solid explanation for the existence of involuntary unemployment is to be found in theGeneral Theory.     

Contingent wage subsidy

This paper proposes a policy aimed at tackling unemployment that arises from macroeconomic coordination failure. The policy offers firms wage subsidies payable only if the total number of new hires made across the economy is below a prespecified threshold. Subsidies provide incentives for firms to create jobs but the policy's goal is to generate a sufficiently large amount of employment spillovers to set off hiring complementarities taking employment beyond the threshold. Thus, subsidies are not distributed but the policy achieves a Pareto improvement. The market structure is important for policy design. Aggregative game techniques prove useful for the oligopsonistic case.     

An equilibrium search model with optimal wage-experience contracts

The objective of this paper is to study equilibrium in a labour market, in which workers search on the job and firms offer wage contracts conditional upon workers' experience and employment status. In this environment, the optimal contract can be described by a promotion contract. The distribution of contract offers is dispersed within and across experience levels. As workers stay longer in the market and promotion dates get closer, the option value of holding a job increases. Firms offer early promotions to attract more experienced workers. A positive relation between experience and earnings can arise purely from firms' optimal response to labour market competition brought about by workers' on-the-job search. We characterise the offer distribution for each experience level and show how these change with labour market conditions.     

Market forms and effective demand: Keynesian results with perfect competition ∗

In recent years there has been a flourishing of models with microfoundations based on imperfect (or monopolistic) competition that claim to yield Keynesian results which, it is held, are incompatible with perfect competi-tion. The paper shows that Keynes’s results do not depend on market forms but are contingent on his treatment of investment. In Keynes’s analysis, the existence of underemployment equilibria is demonstrated regardless of the assumed market form. Far from taking into account the importance of investment, recent models with ‘Keynesian results’ ignore investment altogether.

The article argues that if the investment demand function, with its distinctive characteristics, is removed, involuntary unemployment can be explained only by imperfections or rigidities that prevent producers from pushing their supply up to the level of full employment. A conclusion that Keynes wanted to avoid.

The introduction of a hypothesis of market forms different from imperfect competition may be useful in order to develop macroeconomics along more realistic lines, however, as the conclusions of the paper suggest, this hypothesis loses its analytical power if made separately from a satisfactory treatment of investment.     

Credit market imperfections and persistent unemployment

This paper develops the thesis that credit market frictions may be an important contributor to high unemployment in Europe. When a change in the technological regime necessitates the creation of new firms, this can happen relatively rapidly in the U.S. where credit markets function efficiently. In contrast, in Europe, job creation is constrained by credit market imperfections, so unemployment rises and remains high for an extended period. The data show that there has not been slower growth in the most credit dependent industries in Europe relative to the U.S., but the share of employment in these industries is lower than in the U.S. This suggests that although credit market imperfections are unlikely to have been the major cause of the increase in European unemployment, they may have played some role in limiting European employment growth.     

Born like China,growing like China

This paper studies the effects of China's one‐child policy on saving and foreign reserve accumulation. Fertility control increases the saving rate both by altering saving decisions at the household level, and by altering the demographic composition of the population at the aggregate level. I show that demographically induced changes in saving explain the build‐up of a large foreign surplus in China. As in Song, Storesletten, and Zilibtti (2011), the model features contractual and financial market imperfections. Government‐owned firms are less productive but have full access to the credit market. Entrepreneurial firms are more productive but face credit constraints. As labour switches from less productive to more productive firms, demand for domestic bank borrowing decreases. As saving increases while demand for loans decreases, domestic savings are invested abroad, generating a foreign surplus. The model predicts that China's foreign reserve accumulation will soon begin to slow down in response to recent relaxation of the one‐child policy.     

Does Inequality Foster Corruption?

In this paper, we investigate how inequality affects corruption in the presence of an imperfect credit market. We favor an explanation based on a multimarket framework where corruption in one market (or sector) arises because of imperfections exacerbated by inequality in related markets. We demonstrate that even when an individual's ability to pay bribes and benefit from engaging in corruption are not affected by wealth level, greater (wealth) inequality will lead to an increase in corruption.     

A simple economic theory of skill accumulation and schooling decisions

We propose a model of schooling that can account for the observed heterogeneity in workers' productivity and educational attainment. Identical unskilled agents can get a degree at a cost, but becoming skilled entails an additional unobservable effort cost. Individual labor can then be used as an input in pairwise production matches. Two factors affect students' desire to build human capital: degrees imperfectly signal productivity, and contract imperfections generate holdup problems. Multiple stationary equilibria exist, some of which are market failures characterized by a largely educated workforce of low average skill. Policy implications are explored.     

The Relationship between Output and Unemployment with Efficiency Wages

Abstract. We construct a stylised model of the supply side with goods and labour market imperfections to show that an economy can rationally operate at a low-effort state in which the relationship between output and unemployment is positive. We examine data from the G7 countries over 1960–2001 and find that only German data strongly favour a persistent negative relationship between the level of output and rate of unemployment. The consequence of this is that circumstances exist in which market imperfections could pose serious obstacles to the smooth working of expansionary and/or stabilisation policies and a positive demand shock might have adverse effects on employment.     

Fiscal Policy,Economic Integration and Unemployment

In this paper fiscal policy is examined for an open economy characterized by unemployment due to efficiency wages. We allow for capital and firm mobility in a model where the government chooses the level of wage, source-based capital and profit taxation. The taxing choices of governments are analyzed in scenarios which differ with respect to the constraints imposed on the set of available taxes and on the mobility of firms. As a general result, the welfare loss from labor market imperfections increases when tax bases become internationally mobile, which suggests an increasing relevance of domestic labor-market reforms when tax bases become global.     

Who Exports Better Quality Products to Smaller or More Distant Markets?

The role of across‐firm differences in product quality and firms' competitiveness in determining the spatial patterns of within‐product export unit values across destinations is examined in this paper. Using product level export data, it is shown that the average export unit value of a product shipped from the USA or Korea increases with distance and decreases with destination market's size. However, within‐product average unit values for products exported from China and India decrease with distance and increase with market size. To interpret these different spatial patterns of unit values across exporting countries, model of quality heterogeneity is developed in which firms differ in their workers' skill level and higher‐skilled workers show greater productivity in performing tasks that improve product quality. The model predicts that in relatively skill‐abundant countries, exporting firms specialize in high‐quality products using relatively cheap skilled labor, whereas, in relatively skill‐scarce countries, firms that produce lower‐quality products are more competitive.     

Termination of dynamic contracts in an equilibrium labor market model

In an equilibrium model of the labor market, workers and firms enter into dynamic contracts that can potentially last forever, but are subject to optimal terminations. Upon termination, the firm hires a new worker, and the worker who is terminated receives a termination contract from the firm and is then free to go back to the labor market to seek new employment opportunities and enter into new dynamic contracts. The model permits only two types of equilibrium terminations that resemble, respectively, the two kinds of labor market separations that are typically observed in practice: involuntary layoffs and voluntary retirements. The model allows for the simultaneous determination of a large set of important labor market variables including equilibrium unemployment and labor force participation. An algorithm is formulated for computing the model's equilibria. I then simulate the model to show quantitatively that the model is consistent with a set of important stylized facts of the labor market.     

PARTICIPATION IN WORKPLACE EMPLOYER‐SPONSORED TRAINING IN CANADA: ROLE OF FIRM CHARACTERISTICS AND WORKER ATTRIBUTES

In this work, we study the role of firm characteristics and worker attributes in determining participation in workplace employer‐sponsored training in Canada using the Workplace and Employee Survey (WES) of Statistics Canada. We attempt to answer the following questions using the rich information of firms that are available in WES data: Does firms' provision of workplace training encourage workers' participation in Canada? How do changes in market competition, organizational changes, and technological innovation affect workers' participation in workplace training in Canada? We find that firms' training provision significantly affects workers' participation in Canada. We also find that increased international competition, organizational changes, and technological innovation are significantly correlated with workers' training participation at workplaces. We note that workers in some sectors and in smaller firms have lower workplace training incidence and older, part‐time, production and marketing/sales workers and workers with preschool children participate less in workplace training. (JEL J080, J240, J290)     

Micro Foundations for Wage Flexibility: Wage Insurance at the Firm Level*

To what extent do firms insulate their workers' wages from fluctuations in product markets? Which firm and worker attributes are associated with wage flexibility at the micro level? We first rely on Guiso, Pistaferri and Schivardi (2005) to estimate dynamic models of sales and wages, finding that in Portugal, workers' wages respond to permanent shocks on firm performance, as opposed to transitory shocks. We then explore the factors associated with wage flexibility, finding that collective bargaining and minimum wages are associated with higher wage insurance by the firm, while the threat of firm bankruptcy reduces it. Managers receive less protection against permanent shocks than other workers.     

UNEMPLOYMENT POLICIES IN AN ECONOMY WITH ADVERSE SELECTION

This paper studies the effects of unemployment policies in a simple static general equilibrium model with adverse selection in the labour market. Firms offer a contract that induces the self‐selection of workers. In equilibrium, all unskilled workers are screened out and some skilled workers are rationed out. It is shown that the provision of unemployment insurance raises involuntary unemployment by encouraging adverse selection, while unemployment assistance – or subsidy to unemployment – reduces involuntary unemployment. A simple efficiency wage model is also presented to show that either of the two policies reduces employment by taxing effort and subsidizing shirking. The key is whether the social role of unemployment is a sorting device or a worker discipline device.     

WORK HISTORIES AND LIFETIME UNEMPLOYMENT

A long-standing question in economics is how important unobserved differences across workers are for explaining unemployment. I revisit this topic using variation in lifetime unemployment across workers in U.S. data. A comparison of workers often unemployed with the rest shows that although differences in job-finding rates increase over the course of a career, differences in job-separation rates are large right from the start. I develop a directed search model with symmetric unobserved heterogeneity, in which agents learn workers' types from their labor market histories, to rationalize these findings. The model cannot match the data if unobserved heterogeneity is neglected.