Minimum wages and non-listed firm’s earnings management: Evidence from a geographic discontinuity design

We examine how and to what extent minimum wage shapes non-listed firms’ earnings information production. To identify the causality, we introduce an improved geographic information system technique to locate firms in areas that straddle the continuities of county borders and then exploit discontinuities of minimum wage at county borders. We find that firms significantly manage earnings information upward as response to increases in minimum wages, particularly for firms with financial constraints. Our findings shed light on the effects of labor policy on the information production of firms and provide policy implications to regulators concerned with the allocation efficiency of capital markets.     

Twenty-five years of income inequality in Britain: the role of wages,household earnings and redistribution

We study earnings and income inequality in Britain over the 25 years prior to the COVID-19 pandemic. We focus on the middle 90 per cent of the income distribution, within which the gap between top and bottom in 2019–20 was essentially the same, after taxes and transfers, as a quarter-century earlier. This has led to a narrative of ‘stable inequality’, which we argue misses important nuances and key lessons from the UK's experience. In particular, there have been periods in which household earnings inequalities were changing considerably but tax and transfer policy was offsetting its effects on income inequality – in different directions at different times, reflecting sharp changes of policy approach. Means-tested transfers played a crucial role in containing inequality during the ‘inclusive growth’ period of the 1990s and early 2000s, as well as the Great Recession. During the 2010s, the minimum wage emerged as the government's primary policy tool for boosting incomes, but this happened almost simultaneously with cutbacks to means-tested transfers, meaning that household earnings inequalities fell considerably and yet net income inequality rose.     

Trade Liberalization and Industry Wage Structure: Evidence from Brazil

Industry affiliation provides an important channel through whichtrade liberalization can affect worker earnings and wage inequalitybetween skilled and unskilled workers. This empirical studyof the impact of the 1988–94 trade liberalization in Brazilon the industry wage structure suggests that although industryaffiliation is an important component of worker earnings, thestructure of industry wage premiums is relatively stable overtime. There is no statistical association between changes inindustry wage premiums and changes in trade policy or betweenindustry-specific skill premiums to university graduates andtrade policy. Thus trade liberalization in Brazil did not significantlycontribute to increased wage inequality between skilled andunskilled workers through changes in industry wage premiums.The difference between these results and those obtained forother countries (such as Colombia and Mexico) provides fruitfulground for studying the conditions under which trade reformsdo not have an adverse effect on industry wage differentials.     

Winners and Losers in Transition: Returns to Education, Experience, and Gender in Slovenia

This article, using an unusually rich data set on Slovenianworkers over the 1987–91 period, explores changes in thestructure of wages and employment produced by transition toa market economy. Employment and real wages fell dramaticallyover the period, but the losses were borne disproportionatelyby the least skilled. Across all sectors of the economy, relativewages and employment rose for the most-educated workers. Womengained in comparison with men, primarily because women occupiedsectors less adversely affected by the transition. Pension policies,which encouraged retirement, are shown to have drastically reducedemployment of experienced workers and helped contribute to risingreturns to skill. Increases in returns to education and experiencecontributed to rising wage inequality, but the variance of wagesincreased for workers with identical skills as well.     

On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium

In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.     

Optimal exchange rate flexibility with large labor unions

We study the optimal volatility of the exchange rate in a two-country model with sectoral non-atomistic wage setters, non-traded goods, nominal rigidities and alternative pricing assumptions – producer or local currency pricing. Labor unions internalize the sectoral impact of their wage settlements through firms' labor demand. With local currency pricing, exchange rate depreciation raises sales revenue, which in turn boosts domestic consumption and labor demand. Unions anticipate this effect and set higher wages accordingly. With small unions and low wage markup, optimal monetary policy enhances exchange rate movements to improve its terms of trade. With large unions and high wage markup, optimal monetary policy curbs exchange rate movements to restrain inflationary wage demands and to stabilize employment.     

Macroeconomic Adjustment and Poverty in Selected Industrial Countries

The business cycle affects the incidence of poverty, as shownby evidence from Australia, Sweden, the United Kingdom, andthe United States. Many of the poor in these countries are outsidethe labor market, and transfers are a major source of incomefor many others, but the unemployment and wage reductions thatoccur in recession increase the incidence of poverty. Majorcauses of poverty are unemployment in Australia and the UnitedKingdom and low wages in the United States. Similar cyclicaleffects are observed in Sweden, but a vast transfer programvirtually eliminates poverty. There are several policy optionsfor combating poverty caused by recession. A combination ofunemployment insurance for a limited period followed by a jobguarantee is the most effective policy toward unemployment,whereas poverty caused by low earnings can be remedied by redistributionthrough the tax system.     

Labor Selection,Turnover Costs,and Optimal Monetary Policy

We study optimal monetary policy and welfare properties of a dynamic stochastic general equilibrium (DSGE) model with a labor selection process, labor turnover costs, and Nash bargained wages. We show that our model implies inefficiencies that cannot be offset in a standard wage bargaining regime. We also show that the inefficiencies rise with the magnitude of firing costs. As a result, in the optimal Ramsey plan, the optimal inflation volatility deviates from zero and is an increasing function of firing costs.     

The Effect of Monetary Policy on Consumption Inequality: An Analysis of Transmission Channels through TANK Models

What transmission channels drive the effect of monetary policy on consumption inequality? This paper investigates this question with tractable Two-Agent New Keynesian models with search-and-matching frictions and wage rigidities. I make a distinction between credit-constrained households and unconstrained households and find that an expansionary monetary policy shock decreases consumption inequality between those two households through three channels: (i) the income composition channel, through fluctuations in labor and profit income; (ii) the savings redistribution channel, through fluctuations in real interest rate; and (iii) the earnings heterogeneity channel, through fluctuations in unemployment. The results are in line with the empirical evidence.     

Consumption and Wage Inequality in the US: The Dynamics of the Last Three Decades

In this paper, we look at the evolution of consumption and wage inequality from 1980 to 2016 in the US. We use data from the Consumer Expenditure Survey (CEX) and the Current Population Survey (CPS) to look at differences in consumption and wages across groups in the population defined by educational attainment of the household head and year-of-birth cohort. We show that the results obtained by Attanasio and Davis (1996) for non-durable consumption still hold in more recent decades. In addition to non-durable consumption and services, we look at inequality measured in terms of expenditure on and stock of vehicles. The advantages of looking at these measures are that information on cars is typically measured more accurately than other components of expenditure and consumers are more likely to react by adjusting their stock of vehicles on the basis of long-term expectations about their economic prospects.     

Downward wage rigidity and business cycle asymmetries

The growth rates of wages, unemployment and output of a number of OECD countries have a strongly skewed distribution. In this paper we analyze to what extent downward wage rigidities can explain these empirical business cycle asymmetries. To this aim, we introduce asymmetric wage adjustment costs in a New-Keynesian DSGE model with search and matching frictions in the labor market. Increasing wages is less costly than cutting them. It follows that wages increase relatively fast and thus limit vacancy posting and employment creation, but they decline more slowly, leading to a strong reduction in vacancies and employment. The presence of downward wage rigidities strongly improves the fit of the model to the observed skewness of labor market variables and the relative length of expansions and contractions in the output and the employment cycles. The asymmetry also explains the differing transmission of positive and negative monetary policy shocks from wages to inflation.     

Married couple work participation and earnings elasticities: evidence from tax data

This paper uses administrative tax panel data to estimate work participation and earnings elasticities of married couples by exploiting variation in tax policy. Not only may individuals alter labor supply by working more or less in response to changes in tax policy, they may also alter reported earnings or shift income between taxable and tax-deferred compensation. As a result, in addition to estimating the standard extensive and intensive labor supply elasticities, we also examine elasticities by type of income (wage earnings vs. self-employment earnings) and compensation (taxable vs. tax-deferred). We find that wives have more elastic work participation and earnings than husbands. Furthermore, self-employment income is more responsive to net-of-tax price changes than wage earnings for both husbands and wives, suggesting that it is easier for the self-employed to alter their work hours, work intensity, and/or reported income than wage earners. Finally, we find that wives respond to changes in the net-of-tax price of earnings by altering the amount of earnings subject to current-year taxes through adjustments of tax-deferred contributions to employer-provided retirement accounts.     

The rising skill premium and deunionization

During the past 50 years, the US economy has seen a rapid decline in labor union membership and a substantial rise in wage inequality. Since labor unions compress wages between skilled and unskilled workers, a rising skill premium encourages skilled workers to withdraw from the union. If this withdrawal is accompanied by a fall in the productivity of unskilled workers, firms become reluctant to hire the relatively expensive union workers, reinforcing the decline in the unionization rate. Evaluating this hypothesis, we find that the rise in the skill premium explains about 40% of the decline in the unionization rate.     

Unemployment and the business cycle

This paper presents a dynamic general equilibrium model where labor effort is imperfectly observable and there is unemployment in equilibrium. In contrast to shirking models in the efficiency wage literature, detected shirkers are not dismissed. Instead, they face a monetary punishment because they forgo an increase in their compensation. Estimated versions of the model can generate the high variation in employment and low variation of real wages observed over the business cycle, and are consistent with existing qualitative evidence about the responses of the economy to fiscal policy shocks.     

Taxing multi-nationals under union wage bargaining

This paper investigates corporate taxation under separate accounting (SA) and formula apportionment (FA) in a model with union wage bargaining and multi-national firms. Under SA, we find that increases in the corporate tax rate raise the wage level of domestic workers, while they lower the remuneration of foreign workers. The main insight emerging from a tax competition game is that the endogenous wage level gives rise to an ambiguous fiscal externality, which may dampen the race-to-the-bottom in corporate tax rates. A switch to a tax system with FA principles reverses the impact of corporate taxes on negotiated wages. While increases in the corporate tax rate reduce domestic wages, they raise the wage level of foreign workers. In a tax competition game, the endogenous wage level gives rise to a positive fiscal externality that enforces the race-to-the-bottom in corporate tax rates.     

Does Monetary Policy Affect Income Inequality in the Euro Area?

This paper examines how the ECB's expansionary monetary policy affects income inequality in 10 euro area countries over the period 1999–2014. We distinguish two channels—labor-market and financial—through which monetary policy can have distributional effects. The labor-market channel is captured by wages and employment and the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The labor-market channel enhances the equalizing effect: monetary expansion reduces income inequality stronger by raising wages and employment. There is limited evidence for the financial channel.     

Are older workers overpaid? A literature review

It is widely believed that wage and productivity profiles of individual workers do not coincide at all ages. We give an overview of the theories which provide a rationale for this, and discuss the empirical literature. Human capital theories typically imply that wages rise with tenure, so that job reallocation at old age would imply a wage cut. Incentive theories typically imply that wages exceed productivity at the end of a worker’s career. Bargaining power of unions may also lead to ‘overpayment’ of older workers. Some general conclusions regarding the wages of older workers are formulated on basis of the authors’ reading of the empirical literature.     

The great increase in relative wage volatility in the United States

Over the past 25 years, real average hourly wages in the United States have become substantially more volatile relative to output. Microdata from the Current Population Survey (CPS) is used to show that this increase in relative volatility is predominantly due to increases in the relative volatility of hourly wages across different groups of workers. Compositional changes of the workforce, by contrast, account for only a small fraction of the increase in relative wage volatility. Simulations with a Dynamic Stochastic General Equilibrium (DSGE) model illustrate that the observed increase in relative wage volatility is unlikely to come from changes outside of the labor market (e.g. smaller exogenous shocks or more aggressive monetary policy). By contrast, greater flexibility in wage setting due to deunionization and a shift towards performance-pay contracts as experienced by the U.S. labor market is capable of accounting for a substantial fraction of the observed increase in relative wage volatility. Greater wage flexibility also decreases the magnitude of business cycle fluctuations, suggesting an interesting new explanation for the Great Moderation.     

The Cost of Nominal Rigidity in NNS Models

We present a model with Calvo wage and price setting, capital formation, and estimated rules for government spending and monetary policy. Our model captures many aspects of U.S. data, including the volatility that has been observed in various efficiency gaps. We estimate the cost of nominal rigidity—welfare under flexible wages and prices minus welfare with nominal rigidities—to be as much as 3% of consumption each period. Since there are interest rate rules that virtually eliminate this cost, our model suggests that—contrary to Lucas's (2003) assertion—there is considerable room for improvement in demand management policy.     

Employability and Wage Compensation in an Asian Economy: Evidence for Female College Graduates in Taiwan

The purpose of this study is to analyze the influence of employability skills on wage compensation for female college graduates in Taiwan. We find that employability skills can explain some variation in wage compensation whether we include conventional human capital variables or not. For example, the career management skills category exhibits a consistent and significant influence on wage compensation and could raise the earnings level by 5–6 percent. In addition, employability skills have more diverse effects on wage compensation across various occupations, while conventional human capital variables are shown to have more consistent effects on wage compensation across occupations.