Europeanization or globalization? Transnational wage bargaining and the distribution of activity in European labor markets

This paper investigates the impact of globalization on labor markets, in terms of wage inflation and the distribution of activity across regions. Specifically, we study the effects of aggregation in the labor markets on the distribution of employment and inflation pressures, where there are differences in market structures and transmission mechanisms underpinned by relatively immobile labor. To demonstrate these ideas, we take the European experience as a “laboratory” to show what can be expected from globalization in the labor markets in practice. Using models of wage leadership vs. locational competition, we examine the extent and strength of aggregation effects on labor market costs using a sample of data from 1983 to 2007 which covers the period of the creation of the Euro. We find that the aggregation effect has decreased significantly since the start of EMU, improving the trade-off between inflation and unemployment. At the same time, while Germany played an important role in the run-up to EMU in terms of wage leader, its role has now decreased and been replaced by globalization forces. This implies increased locational competition in terms of wage formation. We demonstrate this with the emerging role of the US as the benchmark for wage setting in Europe.     

The London Business School with Gower Publishing: Forecast Release: EARNINGS AND UNEMPLOYMENT IN THE CAR INDUSTRY: THE BEST AND WORST OF BRITISH INDUSTRY

The Chancellor has described the cost in terms of lost output and higher unemployment of getting inflation down as ‘well worth paying’. Yet the trade-off so far is a miserable 1.25 per cent off the underlying rate of growth of earnings for an unemployment increase approaching 600,000, some 2–3 per cent off the underlying rate of inflation for a 3 per cent drop in GDP and a 7 per cent fall in manufacturing output. The question is clear: why is it that in the UK we seem to have to pay such a high price in terms of lost output and higher unemployment to make only modest progress on reducing wage and price inflation? One possible answer is in terms of the NAIRU; another stems from the way in which we measure retail price inflation. Using the example of the car industry as a backdrop, we examine the relationship between unemployment and inflation and ask whether there is a role for government to play in improving the trade-off. Our conclusion is that the present non-interventionist stance is probably appropriate but that the government should be doing more to educate both sides of the wage bargain - a challenge picked up by the Prime Minister in his recent speech to the CBI. This is especially appropriate at the present time, because price inflation is falling but wage inflation is lagging behind. It is not a cut in real wages that is required but an equi-proportionate deceleration in both wages and prices. By joining the ERM, we will ultimately obtain German rates of inflation; low wage settlements would both shorten the time-scale and reduce the unemployment cost of convergence.     

PHILLIPS CURVES AND UNEMPLOYMENT DYNAMICS: A CRITIQUE AND A HOLISTIC PERSPECTIVE

Abstract.  The conventional wisdom that inflation and unemployment are unrelated in the long run implies the compartmentalization of macroeconomics. While one branch of the literature models inflation dynamics and estimates the unemployment rate compatible with inflation stability, another one determines the real economic factors that drive the natural rate of unemployment. In the context of the new Phillips curve, we show that frictional growth, i.e. the interplay between lags and growth, generates an inflation–unemployment trade-off in the long run. We thus argue that a holistic framework, such as the chain reaction theory (CRT), should be used to jointly explain the evolution of inflation and unemployment. A further attraction of the CRT approach is that it provides a synthesis of the traditional structural macroeconometric models and the (structural) vector autoregressions.     

Transfer payments and the Phillips Curve

Policy makers are today confronted with a worsening relationship between inflation and unemployment. Voluminous economic literature on the “Phillips Curve” has long attempted to show why inflation and unemployment are normally inversely correlated. More recent literature has sought to identify factors that could worsen the apparent tradeoff. This paper uses the labor sector of the System Dynamics National Model to analyze the potential impacts of increased transfer payments on inflation and unemployment. The results suggest that in the short run, higher transfer payments can prolong job search, thereby boosting unemployment, while simultaneously driving up wages due to reduced labor availability. But over the longer term, rising wages raise the attrractiveness of working, thereby compensating for higher transfer payments. Therefore, higher transfer payments are not permanently inflationary. Key long-run impacts of transfer payments may be to raise relative costs of labor, thereby lowering employment through factor substitution, and to discourage dropout from the labor force so as to maintain eligibility for payments.     

What determines inflation in the US,job growth or unemployment?

An empirical investigation of postwar US data reveals that movements in inflation are much more strongly associated with job growth than the unemployment rate. Job growth is found to be strongly related to inflation even after accounting for the effect of the unemployment rate. The residual influence of the unemployment rate on inflation is small, however, after accounting for the effect of job growth. The data shows that in the past inflation has tended to decline when job growth is weak even if unemployment is low. This suggests that the relatively slow job growth of recent years may partly explain the puzzle that, during much of the current expansion, the US economy has experienced little inflation in spite of low unemployment.     

Estimating the natural rate of unemployment and testing the natural rate hypothesis

How should one measure the natural rate of unemployment? This paper proposes a systems procedure as an alternative to NAIRU. The natural rate is treated as an unobserved state variable in a system that includes measurement equations for the unemployment rate, the rate of wage growth and the rate of inflation. The model is derived from a version of the wage bargaining model of Blanchard and embodies a version of the natural rate hypothesis. The model is estimated by embedding the Kalman filter within the full-information maximum likelihood procedure. For US data, the estimated model implies substantial post-war variation in the natural rate and a negative, but weak, effect of inflation surprises on unemployment. Copyright © 1999 John Wiley & Sons, Ltd.     

The Effect of Incomes Policies on Inflation in Bulgaria and Poland

Transition countries, and many other countries with incomplete markets, have faced long periods with both high inflation and unemployment. Policies to reduce inflation without high unemployment include incomes policies, which were widely employed in transition countries. This paper studies the effects of incomes policies on inflation in Bulgaria and Poland in 1990-1993. The actual policies, which were complex and changing, are examined. The policies do not appear well-designed in a technical sense to reduce inflation. A time-series analysis is made which includes standard determinants of inflation including past inflation, wage increases, exchange rate changes, and monetary changes, plus a dummy for incomes policies. The regressions are fairly successful in fitting standard factors that should influence inflation, particularly the exchange rate and unemployment in Bulgaria and wages and unemployment in Poland. They find a fairly substantial inflation-reducing effect from the Bulgarian policy but no significant results from the Polish policy. This revised version was published online in July 2006 with corrections to the Cover Date.     

Forecasting with news sentiment: Evidence with UK newspapers

We investigate the performance of newspapers for forecasting inflation, output and unemployment in the United Kingdom. We concentrate on whether the economic policy content reported in popular printed media can improve on existing point forecasts. We find no evidence supporting improved nowcasts or short-term forecasts for inflation. The sentiment inferred from printed media, can however be useful for forecasting unemployment and output. Considerable improvements are also noted when using individual newspapers and keyword based indices.     

Structural evolution of the postwar U.S. economy

We consider a time-varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the Lucas critique for the postwar U.S. economy. The model allows blocks of parameters to change at endogenously estimated points of time. Contrary to the Lucas critique, there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in “reduced-form” parameters for inflation or the unemployment rate. However, the structure of the U.S. economy has evolved considerably over the postwar period, with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation, though not on the unemployment rate. Related, we find changes in the Phillips curve tradeoff between inflation and cyclical unemployment (measured as the deviation from the time-varying steady-state unemployment rate implied by the model) in the 1970s and especially since the mid-1990s.     

Euro area real-time density forecasting with financial or labor market frictions

We compare real-time density forecasts for the euro area using three DSGE models. The benchmark is the Smets and Wouters model, and its forecasts of real GDP growth and inflation are compared with those from two extensions. The first adds financial frictions and expands the observables to include a measure of the external finance premium. The second allows for the extensive labor-market margin and adds the unemployment rate to the observables. The main question that we address is whether these extensions improve the density forecasts of real GDP and inflation and their joint forecasts up to an eight-quarter horizon. We find that adding financial frictions leads to a deterioration in the forecasts, with the exception of longer-term inflation forecasts and the period around the Great Recession. The labor market extension improves the medium- to longer-term real GDP growth and shorter- to medium-term inflation forecasts weakly compared with the benchmark model.     

A Bounded Model of Time Variation in Trend Inflation,Nairu and the Phillips Curve

In this paper, we develop a bivariate unobserved components model for inflation and unemployment. The unobserved components are trend inflation and the non‐accelerating inflation rate of unemployment (NAIRU). Our model also incorporates a time‐varying Phillips curve and time‐varying inflation persistence. What sets this paper apart from the existing literature is that we do not use unbounded random walks for the unobserved components, but rather bounded random walks. For instance, NAIRU is assumed to evolve within bounds. Our empirical work shows the importance of bounding. We find that our bounded bivariate model forecasts better than many alternatives, including a version of our model with unbounded unobserved components. Our model also yields sensible estimates of trend inflation, NAIRU, inflation persistence and the slope of the Phillips curve. Copyright © 2015 John Wiley & Sons, Ltd.     

Price Inflation in the UK: Has Anything Changed?

Since leaving the ERM, the UK has had low inflation while unemployment has fallen substantially. This suggests that wage and price behaviour may have changed over the recent past. In this article, Ken Coutts and Brian Henry review the evidence for such change, particularly in pricing behaviour, but find little convincing evidence of a major structural shift. Rather, low inflation can be attributed to the effect of weak demand and low capacity utilisation on prices (and wages) which are larger and longer lasting than is generally believed, together with beneficial effects from low world inflation. On leaving the ERM, the government also instituted a classic combination of expenditure-switching and expenditure-reducing policies which played an essential part in promoting recovery without increasing inflation.     

Mismatch Shocks and Unemployment During the Great Recession

We investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium‐scale dynamic stochastic general equilibrium model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is not important for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by around 1.3 percentage points and the natural rate by around 2 percentage points. The mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the Beveridge curve. Copyright © 2016 John Wiley & Sons, Ltd.     

Youth unemployment and terrorism in the MENAP (Middle East,North Africa,Afghanistan, and Pakistan) region

This paper builds on existing research investigating the root causes of terrorism by considering youth unemployment as a measure of economic deprivation. In particular, the study focuses on terrorism in Middle Eastern and North African (MENAP) countries and features terrorism incident count data for the period 1998–2012 using negative binomial regression models. In our exogenous model, we find that while youth unemployment tends to increase domestic terrorism, it does not have any significant effect on transnational terrorism. Given concerns about endogeneity of youth unemployment in these models, we use two kinds of corrections-instrumental variables and lagged variables. We control for endogeneity by using military expenditure, under-five mortality rate and foreign direct investment as instruments. We are not able to reject the null hypothesis that youth unemployment is exogenous. Using lagged variables, we find a similar result as noted in the exogenous specifications with regard to the effect of youth unemployment on domestic and transnational terrorism. We also find evidence that domestic terrorism tends to have a positive relationship with press freedom, religious and linguistic fractionalization, and area of the country. Transnational terrorism has a positive association with the quality of democracy and a negative association with political stability and regulatory quality. The amount of natural resources tends to be negatively associated with domestic terrorism and positively associated with transnational terrorism.     

Monetary Policy in the Greenspan Era: A Time Series Analysis of Rules vs. Discretion*

Relationships between the Federal funds rate, unemployment, inflation and the long‐term bond rate are investigated with cointegration techniques. We find a stable long‐term relationship between the Federal funds rate, unemployment and the bond rate. This relationship is interpretable as a policy target because deviations are corrected via the Federal funds rate. Deviations of the actual Federal funds rate from the estimated target give simple indications of discretionary monetary policy, and the larger deviations relate to special episodes outside the current information set. A more traditional Taylor‐type target, where inflation appears instead of the bond rate, does not seem congruent with the data.     

Labor market institutions and inflation volatility in the euro area

Despite having had the same currency for many years, EMU countries still have quite different inflation dynamics. In this paper we explore one possible reason: country specific labor market institutions, giving rise to different inflation volatilities. When unemployment insurance schemes differ, as they do in EMU, reservation wages react differently in each country to area-wide shocks. This implies that real marginal costs and inflation also react differently. We report evidence for EMU countries supporting the existence of a cross-country link over the cycle between labor market structures on the one side and real wages and inflation on the other. We then build a DSGE model that replicates the data evidence. The inflation volatility differentials produced by asymmetric labor markets generate welfare losses at the currency area level of approximately 0.3% of steady state consumption.     

Using a Structural‐Form Model to Analyze the Impact of Home Ownership on Unemployment Duration

It is often found that the impact of home ownership on the hazard rate for leaving unemployment is positive, indicating that home ownership helps workers to leave unemployment for a paid job. However, little emphasis has been given to how such a relationship can be explained. This paper estimates a structural‐form model that allows for self‐selection into home ownership and the risk of home owners losing their property during a spell of unemployment. We find a substantial amount of self‐selection using indirect inference based on a mixed proportional hazards‐rate model and find virtually no impact of home ownership on individual labor market performance. Copyright © 2016 John Wiley & Sons, Ltd.     

Oil price shocks and unemployment in Central and Eastern Europe

The aim of this paper is to examine the effect of oil price movements on unemployment in Central and Eastern Europe. We do this by disentangling oil prices movements by their sign and from there we analyse the separate effects of positive and negative movements of oil prices on unemployment rates. We find that, although oil prices and unemployment are not correlated very much in the short run, the effect of oil price shocks on the natural rate of unemployment goes in the same direction, so that increases or decreases in oil prices increase or decrease the natural rate of unemployment.     

Trade, migration and regional unemployment

A by now large literature in regional economics has greatly improved our understanding of the determinants of the observed spatial disparities in productivity. However, this literature neglects what seems to be a robust and persistent fact accompanying regional productivity differences: high productivity regions also have lower unemployment than low productivity regions. In this paper, we set out a model in the New Economic Geography (NEG)/job search tradition to explore the theoretical determinants of this fact. We find that the same forces producing regional agglomeration and productivity differences also generate persistent unemployment disparities. Moreover, we highlight a contrast between the short-run and long-run effects of migration on regional unemployment. In particular, migration from the periphery to the core may reduce unemployment disparities in the short-run, but exacerbates them in the long-run.