Economic migration and business cycles in a small open economy with matching frictions

With the free movement of labour in Europe, economic migration has become an important determinant of labour supply. Cyclical migration exceeds one percent of the population in many countries and affects (un)employment and wage setting. The main contribution of this paper is that it models migration as an endogenous decision in a search-and-matching framework, where labour market institutions play an important role. It shows that, contrary to typical beliefs, migration can amplify business cycles. After a positive shock to the economy, immigration increases the labour force and initially unemployment. The latter reduces a worker's outside option in wage negotiations, resulting in a lower wage increase than when there is no migration. With cheaper labour firms post more job vacancies, which increases the probability that unemployed workers find jobs and attracts new workers to immigrate. Attenuated response of wages and the stronger response of employment to shocks result in a flatter Phillips curve.     

Excess demand for labor, unemployment, and theories of the Phillips curve

This article has two purposes. First, to examine the assumption that it is possible to map uniquely between unemployment and excess demand for labor; this assumption plays a key role in the theory of the Phillips curve. We show that as both unemployment and excess demand for labor are endogenous and simultaneously determined, in general it is not possible to obtain a unique mapping between unemployment and excess demand for labor and that the Lipsey and Barro and Grossman derivations of the Phillips curve are invalid. Secondly, the article recommends that wage, employment, and unemployment behavior be modelled using short-run supply and demand curves, that is, in a Marshall-Hicks temporary equilibrium framework.     

Wage Determination In Australia*

This paper examines whether a stable expectations-augmented Phillips curve exists for Australia. High real wages in the face of continuing high unemployment over the past decade have led to suggestions that the level of unemployment has little effect on wage determination, with the bargaining process taking place between employers and those employees in ‘secure employment’. Results from aggregate data suggest that the level of unemployment is relevant to wage determination. In addition, the impact of overtime on the growth in money wages is consistent with the view that those in secure employment are influenced by labour market conditions.     

A simple test of the theory of the short-run Phillips curve

The theory of the Phillips curve is reexamined taking into account the relationship between workers and firms. Emphasis is given to the firm's role in determining employment and hours over the business cycle. Empirical relations between real wages, employment and unemployment using distributed lag estimation are examined.     

Unemployment consequences of an aging population: an application of insider-outsider theory

The model developed in this paper asserts that unions attach greater weight to the wishes of older workers than they do to the wishes of young workers, and wages and employment are determined by efficient bargains. Then, the wages of old workers are always higher than the wages of young workers regardless of productivity and relative supply. Employment is influenced mainly by outside opportunities. In the plausible case where old workers cannot easily get senior jobs outside their firm, junior unemployment is higher than senior unemployment. A seemingly robust result is that an increase in the ratio of old to young workers (population aging) reduces the unemployment rate and wage rate of both groups in the population.     

Earning Curves and Wage Curves

Using British county data for full-time male manual workers we extend earlier work to investigate wage and earning curves. We distinguish between total earnings and hourly wages for standard hours, uncontaminated by overtime premium. Using data from 1980–1995 we find that earnings behaviour is dominated by volatile hours in the short run, while wage growth is highly sensitive to the level of unemployment as in the classical Phillips curve with macro data. Macro evidence for sticky wages is thus confirmed at the local level, and the wage curve of rapid adjustment is rejected for normal hourly wages.     

Worker flows, job flows and firm wage policies

Like many transition economies, Slovenia is undergoing profound changes in the workings of the labour market with potentially greater flexibility in terms of both wage and employment adjustment. To investigate the impact of these changes, we use unique longitudinal matched employer‐employee data that permits measurement of employment transitions and wages for workers and enables links of the workers to the firms in which they are employed. We can thus measure worker flows and job flows in a comprehensive and integrated manner. We find a high pace of job flows in Slovenia especially for young, small, private and foreign‐owned firms and for young, less educated workers. While job flows have approached the rates observed in developed market economies, the excess of worker flows above job flows is lower than that observed in market economies. A key factor in the patterns of the worker and job flows is the determination of wages in Slovenia. A base wage schedule provides strict guidelines for minimum wages for different skill categories. However, firms are permitted to offer higher wages to an individual based upon the success of the worker and/or the firm. Our analysis shows that firms deviate from the base wage schedule significantly and that the idiosyncratic wage policies of firms are closely related to the observed pattern of worker and job flows at the firm. Firms with more flexible wages (measured as less compression of wages within the firm) have less employment instability and are also able to improve the match quality of their workers. JEL Classifications: J23, J31, J41, J61, P23, P31.     

Excess supply equilibria

This paper addresses a fundamental problem in economic theory: How can there be equilibria of the economic system where some commodity is in excess supply, yet that commodity's relative price shows no tendency to fall? Of course, the principal example of such a phenomenon is an economy experiencing a prolonged period of involuntary unemployment of the labor force during which there is no significant change in the real wage.In the following pages, I shall describe a two-commodity, general equilibrium model that has a continuum of unemployment equilibria, one for any given unemployment rate. The important feature of this model is that workers establish their wage rates in an attempt to maximize expected utility. The information upon which these wage setting decisions are based is provided by actual labor market transactions.Despite the voluntary nature of the wage setting decision, I shall argue that each equilibrium of this economy exhibits involuntary unemployment in the Keynesian sense. For there will always be another equilibrium with a lower real wage, a higher level of employment, and at which (at least when workers are risk neutral) each worker achieves a higher level of expected utility.     

Insider-outsider influences on industry wages

The persistence of high rates of unemployment in Europe has focused renewed attention on the wage determination process. One aspect which has received particular attention recently is the extent to which wages are determined by insiders, with outsiders having little impact on the wage bargain. If outsiders are disenfranchised in the wage determination process, they may be unable to underbid themselves into employment. The insider-outsider model, and the associated implication of hysteresis, thus provides a possible explanation for persistent involuntary un-employment. Most empirical work on the importance of the insider-outsider model and hysteresis has been done at the aggregate level, either by testing whether wage growth is related to the level or the change in unemployment, or by testing if employment or unemployment follows a random walk. This paper extends both of these lines of analysis to the industry level. Based on a specification which nests alternative models of the wage determination process, estimation results are presented for fifteen industries using annual data for fourteen industrialized countries, and for pooled time-series cross-country data. The paper also tests the hypothesis that only industry-specific variables are important to the determination of industry wages and considers whether differences in industry wage determination might help to understand cross-country differences in unemployment. The results offer considerable support to the insider view of wage determination. Industries in which wages seem to be determined by a natural rate/Phillips curve model — the primary competing model considered in the paper — appear to be the exception rather than the rule. Moreover, at the industry level hysteresis does not appear to characterise wage formation in the high-unemployment European countries to a greater extent than in North America and Japan.     

Minimum wages and youth unemployment

This paper constructs a labor search model to explore the effects of minimum wages on youth unemployment. To capture the gradual decline in unemployment for young workers as they age, the standard search model is extended so that workers gain experience when employed. Experienced workers have higher average productivity and lower job finding and separation rates that match wage and worker flow data. In this environment, minimum wages can have large effects on unemployment because they interact with a worker's ability to gain job experience. The increase in minimum wages between 2007 and 2009 can account for a 0.8 percentage point increase in the steady state unemployment rate and a 2.8 percentage point increase in unemployment for 15–24 year old workers in the model parameterized to simulate outcomes of high school educated workers. Minimum wages can also help explain the high rates of youth unemployment in France compared to the United States.     

International Trade and Unemployment—the Worker‐selection Effect

This paper investigates the labor market effects of trade liberalization. We incorporate trade unions and heterogeneous workers into the Melitz framework. Workers differ with respect to their abilities. Our main findings are: (i) trade liberalization harms low‐ability workers, they lose their job and switch to long‐term unemployment (worker‐selection effect); (ii) high‐ability workers are better off in terms of both higher wages and higher employment; (iii) if a country is endowed with a large fraction of low‐ability workers, trade liberalization leads to a rise in aggregate unemployment—in this case, trade liberalization may harm a country's welfare; (iv) the overall employment and welfare effect crucially hinges on the characteristics of the wage bargain.     

A Quantile Regression Analysis of Wages in Panama

Differences in the effects of worker characteristics on wages in Panama at different points of the conditional wage distribution are investigated. Public sector employment increases wages relatively more at lower quantiles. Within the public sector, employment in that sector increases wages of the median worker and reduces wage inequality. Presence of a labor union increases relatively more private sector wages at lower quantiles. Unions reduce wage inequality within the union private sector and increase average wages within that sector. In the public sector, the presence of a labor union increases wages of men at lower quantiles at a lower rate than in the private sector. Self-employment decreases wages at lower quantiles and increases wages at higher quantiles. Urban location affects wages in a U-shaped pattern as one moves from lower to higher quantiles. Rates of return to experience are higher for men at higher quantiles. Experience increases men's wage inequality.     

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.     

Unemployment–inflation trade-offs in OECD countries

Inflation and unemployment reduce welfare of individuals and should be as low as possible in any economy. Cointegration and Granger causality tests suggest that there are long run relations between these two variables among the OECD economies. While rates of unemployment vary significantly among these economies, rates of inflation have stabilised at lower rates as a result of inflation targeting policies adopted in them during the last two decades. The Phillips curve phenomena are still empirically significant for 28 out of 35 of these OECD economies in country specific regressions; in fixed and random effect panel data models and in a panel VAR model for 1990:1 to 2014:4. Country specific supply curves and Okun curves are consistent to thin Phillips curve relations. Leftward shifts in the Beveridge and Phillips curves require labour market reforms balancing between job creations and destructions. Complementing macro stimulations by microeconomic structural and institutional reforms can bring efficiency in bargaining for wages and employment among firms and workers to make unemployment–inflation trade-offs more significant and relevant in these economies.     

WAGES AND EMPLOYMENT IN THE U.S. APPAREL INDUSTRY

This article uses individual-level data from the U.S. Census, Public Use Microdata Sample (PUMS), to examine wages and employment in the U.S. apparel industry. Total employment in this sector has been falling since 1970, and its overall average wage is the lowest of 25 industry aggregates. But disaggregation by gender, education, and nativity reveals that groups of highly educated male native workers earn higher average wages in apparel than in other industries. Moreover, after adjusting for observed individual differences in human capital (in addition to the three characteristics used to form worker subsets), highly educated male natives earn positive wage premiums in this sector. In contrast, most categories of immigrants and female natives earn relatively low average wages and experience negative wage premiums in apparel. This variation in the adjusted industry wage premiums across worker groups may be related to apparel's relative exposure to imports and immigrant workers.     

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.     

Job Security,Financial Security and Worker Well‐being: New Evidence on the Effects of Flexible Employment

This paper uses panel data drawn from the Household, Income and Labour Dynamics in Australia (HILDA) survey to provide new evidence of the links between unemployment, wages, job security, financial security and workers' well‐being for workers in flexible employment. Our findings indicate that workers in flexible employment encounter more unemployment and experience increased job insecurity; unemployment is associated with wage penalties. Lower wages, job insecurity and financial insecurity affect well‐being. However, these negative outcomes are mitigated by longer job tenure. Our results have implications for moves towards a flexicurity model of employment     

Incidence and Duration of Unemployment Spells: Implications on the Wage Differentials of Part-Time and Full-Time Workers

This article analyzes the extent to which incidence of unemployment and duration of unemployment spells affect the wage differentials between full-time and part-time workers. The estimation results of a sample selectivity bias–adjusted wage equation reveal that high incidences of unemployment are associated with low wages for both full-time and part-time workers. However, the reduction in wages due to incidence of unemployment is larger for full-time workers in high-paid jobs than for their part-time counterparts. Duration of unemployment spells affects full-time and part-time workers differently. In general, longer unemployment spells tend to increase the wages of full-time workers but tend to depress the wages of part-time workers. Although the probability of unemployment is not a factor in explaining the wage differential, the duration of unemployment accounts for a substantial portion (about 66.6% in full sample) of the wage differential that exists between full-time and part-time workers.     

Market power in a billateral monopoly model of industry wage determination

A variant of the Hicksian bilateral monopoly model is constucted. We show that market power can, in principle, affect the rate of change of money wages quite independently of unemployment, hence deserves a place in the derived wage equation, contrary to the postulate of the excess demand model. Our modified Hicksian model is submitted to a test and found to be consistent with the empirical evidence. Finally, some implications for the Phillips curve analysis are discussed.     

Unobserved Heterogeneity,Exit Rates,and Re‐Employment Wages

Exit rates from unemployment and re‐employment wages decline over a period of unemployment, after controlling for worker observable characteristics. We study the role of unobserved heterogeneity in an economy with asymmetric information and directed search. We show that the unique equilibrium is separating and that skilled workers have more job opportunities and higher wages. The composition of the unemployed varies with the duration of unemployment, so average exit rates and wages fall with time. The separating equilibrium relies on performance‐related pay schemes and the ability of firms to commit to renting an input that is complementary to worker skills.