Is there a Laffer curve between aggregate output and public sector employment?

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is “small” and negative, when it is “large”. Using the annual data from 22 OECD countries over the period 1960–1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output. First version received: October 1996/Final version received: April 2000     

The market for labour in Israel

Using annual observations for 1960–89, a complete economic model of the Israel labour market is estimated in which the demand for labour varies inversely with real wages, participation varies directly with the real wages and real wages are explained by a phillips curve in which the natural rate of unemployment is a variable. The model suggests that while wages are far from flexible, unemployment shocks die away fairly rapidly. we were unable to model the behaviour of public sector pay and employment.     

What are the determinants of hiring? The importance of product market demand and search frictions

In this article, we study the importance of product market demand and search frictions for hiring. We use a search-matching model with imperfect competition in the product market to derive an equation for total hiring in a local labour market, and estimate it on Swedish panel data. If product markets are imperfectly competitive, product demand shocks should have a direct effect on employment for given levels of prices and wages. Our main finding is that product demand has such a direct effect on hiring. This highlights the importance of taking imperfect competition in the product market into account in studies of employment dynamics and hiring. We also find that, for given levels of prices, wages, and product demand, the number of unemployed workers in a local labour market has a positive effect on hiring, suggesting that search frictions matter. Quantitatively, product demand shocks seem to be more important for understanding the variation in hiring than shocks to the number of unemployed workers.     

Stochastic and structural fiscal policy in a monetary stationary economy

In the framework of a monetary asset pricing model which is simple enough to generate closed form formulae for equilibrium price functions the interactions between output, fiscal policy, and asset markets is investigated. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with anticipated (stochastic) fiscal policy changes, while the impact of unanticipated (structural) fiscal policy on the stock market depends qualitatively on the ‘business cycle’ of the economy. It is shown that the monetary character of the economy, more precisely the role of money in the exchange process, is critical for the relationship between fiscal policy and real share prices. Moreover, while contingent fiscal policy measures may be successful in stabilizing the real interest rate on money they are incapable of achieving a stable term structure of the real rate on stocks. In contrast, uncontingently higher public expenditures generally promote the volatility of the real rates on financial assets.     

Trade prices and supply in the UK economy

Current account imbalances are a major source of instability in the world monetary and trading system. Measures to correct these imbalances have largely involved adjustments to exchange rates. In the international trade literature, when the current account is in deficit, the Marshall-Lerner condition is sufficient for a successful devaluation. However, this partial equilibrium condition — apart from being based on the assumption that supply elasticities are infinite — abstracts from how the domestic economy responds to the change in relative prices. In this paper we develop a model of price and output determination in an open economy with imperpectly competitive markets, and draw a distinction between goods which are exported and those which are supplied to the domestic market. This means that we have to determine jointly both export prices and the domestic price of house sales. We show that as long as there is no money illusion in the labour market a fall in the nominal exchange rate raises domestic and export prices proportionally and leaves trade volumes unaffected. However, shifts in domestic absorption relative to overseas demand — by changing relative prices — cause shifts in the relative supply of exports and domestically sold goods and affect the trade balance. Thus fiscal and monetary measures directed towards reducing domestic absorption are more likely to be successful in correcting current account imbalances than exchange rate depreciation.     

Macroeconomic Effects of Asset‐Price Shocks in a Globalized Financial Market

In this paper, I study a model in which shocks to asset prices affect the real sector of the economy through a credit channel. As financial markets become internationally integrated, the economy becomes less vulnerable to domestic asset‐price shocks, but more vulnerable to foreign asset‐price shocks. To the extent that monetary policy stabilization is feasible and desirable, the globalization of financial markets shifts the focus of monetary policy from domestic asset prices to worldwide asset prices.     

Wages and Employment in China''s SOEs, 1980–1994: Corporatization, Market Development, and Insider Forces

Using firm-level panel data, we evaluate the importance of reform measures, market development, and insider forces in wage and employment determination in China's state sector. Initial output per worker is positively correlated with change in employment, and market wages are significantly associated with firm employment and wages in the later period. Both indicate development of the labor markets. Corporatization lowered wages by 11 to 15% and improved productivity by 6%. Finally, we find evidence that labor markets for managers and engineers have been developed more than those for production workers and that wage premiums for college graduates have increased dramatically since the late 1980's. J. Comp. Econom., December 1999, 27(4), pp. 702–729. IRIS, University of Maryland, College Park, Maryland 20742.     

Relative Prices in Monetary Union and Floating

The setting is a small open economy with an open sector and a sheltered sector. If the unions that operate in each sector coordinate their wage claims within the sector, the choice of monetary regime—monetary union or floating with an inflation target—affects the relative prices of tradables and non–tradables as well as real wages and employment. EMU membership results in lower prices of tradable goods and lower relative wages in the open sector, while opposite results hold for sheltered sector prices and wages.
JEL classification : E 5; E 24; E 42; J 5; J 31     

Microeconomic modeling of parallel markets: The case of agricultural goods in the USSR

In a centrally planned economy, non-market-clearing prices fixed by the state cannot be used directly to estimate consumer behavior models. This paper represents an attempt to overcome this problem by utilizing prices in a parallel “free” market. An equilibrium model incorporating parallel markets is discussed and a demand curve arising from this model is estimated using data for the markets for meat and milk in the USSR. the price and income elasticities of demand for these goods are found to be significantly higher than those estimated for the United States.     

The trade-off between real wages and employment in an open economy (Belgium)

The purpose of this paper is twofold. First, we discuss the nature and quantitative order of magnitude of the trade-off between real wages and employment in the small open economy Belgium. Second, we draw policy conclusions from our positive analysis, and compare income policies with alternative approaches to employment stimulation (including shorter working hours and currency depreciation).To study the trade-off between real wages and employment, we treat external balance as a binding constraint on demand management. An exogenous increase in real wages, affecting adversely the competitiveness of domestic producers on the export and import markets, impairs external balance. The impact of the wage increase on output and employment is evaluated through the reduction in domestic demand required to restore external balance.At the empirical level, we endeavour to evaluate separately the influence on exports and imports of domestic costs at unchanged capacity levels, and of capacity levels themselves. And we endeavour to evaluate the influence of real wages on capacity levels through scrapping and investment. All evaluations rely on the foreign trade equations of econometric models of the Belgian economy.The conclusions from our empirical investigation are first that estimates of the trade-off between real wages and employment in Belgium are subject to considerable imprecision; second that the short-run elasticity of employment with respect to real wages keeping capacity constant is probably quite small (like -0.2), and definitely less than unity in absolute value; third that the corresponding medium-run elasticity taking into account capacity adjustments is probably sizeable (like -2), and definitely larger than unity in absolute value; and fourth that exchange rate adjustments might not make too much difference, in either the short run or the medium run.Turning to a discussion of policy, we shall argue that these conclusions give support to a policy of constant real labour incomes, of comprehensive efforts to redistribute work through shorter working hours or related schemes, and of selective efforts to slow down capacity scrapping.     

Imperfect Competition and the Gains from Trade in a Macro Duopoly Model

A general-equilibrium duopoly trade model is developed. In the micro model, constant-elasticity market demand curves produce backward-bending reaction functions. This is combined with a macro analysis in which the real wage is determined competitively, while nominal variables depend on the money supply. Trade can lead to large increases in aggregate output, employment, and real wages. The gains from trade are the result of increases in market size, and greater competition in each market. The benefits of trade are largest when marginal-cost curves slope downward and the labor supply curve is elastic.     

Real exchange rates,asset prices and terms of trade: A theoretical analysis

This paper develops a continuous-time two-country dynamic equilibrium model, in which the real exchange rates, asset prices, and terms of trade are jointly determined in the presence of nontradable goods. The model determines the relation between the financial markets and real goods markets in the world economy and their responses to various shocks under the home bias assumption. A positive domestic supply shock induces a positive return on the domestic asset markets and a deterioration of terms of trade that improves the foreign output and boosts the foreign asset markets. Demand shocks act in the opposite way. This model also analyses the impact of change in the relative price of nontradable to tradable goods on the terms of trade and asset markets. A higher productivity growth in tradable goods than in nontradable goods leads to a higher relative price of nontradable to tradable goods, which appreciates the real exchange rate, deteriorates the terms of trade, and depresses the domestic and foreign asset markets. A lower relative price of nontradable goods depreciates the real exchange rate, improves the terms of trade, and lifts both the domestic and foreign asset markets.     

Fertility Decisions and Gender Differences in Labor Turnover, Employment, and Wages

A striking observation of the U.S. and other labor markets is the weak position of women in terms of job attachment, employment, and earnings relative to men. We develop a model of fertility and labor market decisions to study the impact of fertility on gender differences in labor turnover, employment, and wages. In our framework, individuals search for jobs and accumulate general (experience) and specific (tenure) human capital when they work. They can also increase their wage by moving to a job of higher quality. Labor market decisions (e.g., job acceptance and job mobility) may differ across genders: females that give birth may decide to interrupt their labor market attachment in order to enjoy the value of staying at home with their children. The model economy is successfully calibrated to match aggregate statistics in terms of fertility, employment, and wages. We find that fertility decisions generate important gender differences in turnover rates, with long lasting effects in employment and wages. These differences in labor turnover account for almost all the U.S. gender wage gap that is attributed to labor market experience by Blau and Kahn (2000, Journal of Labor Economics15(1), 1–42). The model also implies a very small role of tenure capital in accounting for wage differences between males and females (gender gap), and between females with and without children (family gap). Journal of Economic Literature Classification Numbers: E24, J13, J21, J31.     

The Liverpool macroeconomic model of the United Kingdom

The paper describes the Liverpool Model, a rational expectations model of the UK economy used for forecasting since March 1980. The model is of the ‘new classical’ type, in that all markets clear; in the labour market, there is a union sector with one-year nominal wage contracts but the non-union sector clears excess demands. Equilibrium (or ‘natural rate’) values of output, employment, real wages, etc are endogenously determined. In- and out-of-sample errors, a full set of simulations, and a complete listing are included. The interim experience of the model as a test bed for rational expectations methods is ‘far from discouraging’.     

Privatization and efficiency wages

The impact of privatization is investigated in a shirking model of efficiency wages. Without trade unions, privatization — modeled as a stricter control of employees — lowers wages and raises employment, output, and profits, while effort and productivity effects depend on the employees' risk aversion. However, for a utilitarian monopoly union, facing a company characterized by a constant-elasticity labor-demand schedule, privatization raises efficiency wages. If privatization is modeled as a stronger profit orientation, wages, effort, and labor productivity will rise, while employment will shrink in a wage-setting firm. Again, wage and employment effects can be reversed in the case of wage negotiations.     

The Real Effects of Transnational Activity upon Investment and Labour Demand within Japan's Machinery Industries

This paper attempts to estimate the real effects of transnational activity upon both investment and labour demand, within each of the five industries that comprise Japan's domestic machinery sector. The study uses a standard model of investment and labour demand, which is augmented to include foreign wages. It is argued that this approach is the most suitable for capturing the real effects of transnational activity, since foreign wages indicate the attractiveness of alternative sites for investment, production and employment. A simultaneous equations estimator is employed and, for each industry, there is evidence that both the behaviour of investment and labour demand are sensitive to foreign wage conditions. The results indicate the extent to which transnational activity has had a real effect upon Japan's domestic machinery sector.     

Chinese resource demand and the natural resource supplier

This article provides empirical evidence on the effects of Chinese resource demand on the resource-rich natural resource supplier using the example of Australia. A structural VAR model is used to examine the effects of Chinese resource demand, commodity prices and foreign output on the macroeconomy with a formally specified mining and resource export sector. The key findings of the article are that shocks to Chinese demand and commodity prices result in a sustained increase in commodity prices and mining investment and a positive impact on the resource sector. However, these shocks eventually lead to lower real domestic output with factors of production moving out of the nonresource sectors and into the resource sector, resulting in a fall in nonresource sector output which is not fully offset by the rise in resource sector output. The results also indicate some market power by the natural resource supplier.     

Die mittelfristigen Folgen der Wechselkurspolitik für Leistungsbilanz und Inflationsrate

Summary Nowadays it is uncontested that price elasticities of demand for exports and imports are high enough to secure an improvement of the current account of the balance of payments in the case of an exchange rate devaluation. Indeed it may take some time until the effects materialize and the primary effect may even run in the opposite direction. However, doubts arise about the favourable reaction of the current account if secondary price and wage effects are taken into consideration—what has been done more thoroughly in recent times.The present study deals with the medium term aspects of exchange rate changes in Austria. In order to quantify exchange rate effects on foreign trade and prices double weighted exchange rate indices and double weighted foreign trade price indices were computed and a simple econometric model was built. Behavioural equations for quantities and prices of exports and imports (as far as possible, disaggregated for raw materials, energy and manufactures), for domestic prices and wages were estimated. In addition to this model exchange rate effects on tourism were considered separately. In order to evaluate the consequences of the revaluation of the Austrian Schilling simulations were run under the assumption that in the period 1972 till 1976 Austria had kept constant the average exchange rate of the currencies of its main trading partners (competitors). The main results are as follows: If Austria had pursued a constant exchange rate policy in terms of the export weighted exchange rate index during the years 1972 to 1976 instead of actually revaluating the Schilling by 19 percent the volume of exports would have been higher by 1 billion Schilling (at 1970 prices) whereas the volume of imports would have been lower by 16 billions Schilling; measured in current prices exports and imports would have been higher by 59 billions and 60 billions, respectively, and the receipts from tourism would have grown faster by 12 billions. Therefore, the trade balance would have deteriorated by 1 billion and the current account would have improved by 11 billions. By 1976 consumer prices and wages would have reached a higher level (+7 3/4 percent and +5 1/4 percent, respectively). The results of this study are not in contradiction to those obtained in comparable work for other countries.There is some indication pointing to a further deterioration of the current account in the longer run: The revaluation caused profit squeeze which hits exporters as well as import competing domestic producers may weaken investment and the ability to maintain market shares. The revaluation could favour the sheltered sector of the economy in comparison to the exposed sector and shift the structure of the economy to the disadvantage of the current account.     

On shareholder unanimity in the mean-variance model

It is shown that shareholder unanimity in the mean variance model of capital asset markets implies production decisions which maximize the net market value of a firm in a ‘large’ stock market.     

Asset price fluctuations without aggregate shocks

We analyze the pricing of a productive asset in a class of dynamic exchange economies with heterogeneous, infinitely-lived agents, and self-enforcing intertemporal trades. Individual incomes fluctuate and are correlated; preferences, dividends and aggregate income are fixed. Almost all economies in this class have a unique stationary Markovian equilibrium with fluctuations in asset prices. As the set of unrationed households changes over time and states, excess demand functions shift, asset returns fluctuate, and some households are shut out of asset markets. Examples suggest that the amplitude of these movements is negatively correlated with the productivity of the asset and with the penalty for default.