Public firms' merger,employment, and welfare in developing countries: A general equilibrium analysis

This paper examines the effect of a merger of state‐owned firms on wage gap, employment, and social welfare in a general equilibrium setting. For a developing economy with state‐owned firms in the urban sector, a merger via a reduction in the number of the urban state‐owned firms can reduce the cost of capital. It then lowers the skilled wage rate through the factor‐substitution effect, while it raises the unskilled wage by the inflow of capital to the rural sector and hence lowers urban unemployment. In addition, the reduction in the number of the urban state‐owned firms can yield a scale effect to the firms. The beneficial effects on higher urban output and less urban unemployment can improve social welfare of the developing economy.     

International Borrowing, Specialization, and Unemployment in a Small Open Economy

The authors show that an increase in international borrowing increases specialization and unemployment in a small open economy that is subject to terms‐of‐trade risks. The economy has a production advantage in the export sector. However, the size of the export sector is limited by the available funds. To insure workers against income fluctuations arising from terms‐of‐trade risks, firms in the export sector offer workers a stable wage rate with the possibility of unemployment. An increase in international borrowing increases specialization in the export sector, which leads to higher unemployment when the terms‐of‐trade shock is bad. A state‐contingent price subsidy can reduce unemployment without inefficiently reducing specialization. The results are robust to the introduction of risk‐averse firms.     

The choice of technology in economic development

The impact of capital accumulation on job creation is an important and interesting issue in economic development. This model provides a general-equilibrium framework for studying technology choice with unemployment in a developing economy based on micro-foundations. Unemployment in the urban sector results from the existence of efficiency wages. Manufacturing firms engage in oligopolistic competition and choose technologies to maximise profits. A more advanced technology uses more capital and less labour. In the steady state, an increase in the amount of capital induces firms to choose more advanced technologies and the wage rate increases. While a higher capital stock always induces firms to choose more advanced technologies, urban unemployment rate may decrease and agricultural sector employment may increase.     

Corporate profit tax,firm entry with unemployment,and income inequality

In this paper, we provide a general equilibrium analysis of corporate profit tax on income distribution, unemployment, and wage inequality. With firm dynamics in industrial sector, we identify a new channel through which profit tax affects income and wage inequality: profit tax cut will widen not only the wage gap between skilled and unskilled labor, but also exacerbate the wage inequality of unskilled labor among different sectors. The welfare effect of profit tax cut depends on unemployment deepening (labor-distortion effect) and more manufacturing firms enter the market (business-creation effect), eroding the market share of incumbent firms (business-stealing effect).     

Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis

The paper develops a static three sector competitive general equilibrium model of a small open economy in which skilled labor is mobile between a traded good sector and the non-traded good sector and unskilled labor is specific to another traded good sector. Capital is perfectly mobile among all these three sectors. We introduce involuntary unemployment equilibrium in both the labor markets and explain unemployment using efficiency wage hypothesis. We examine the effects of change in different factor endowments and prices of traded goods on the unemployment rates and on the skilled-unskilled relative wage. Also, we introduce Gini-Coefficient of wage income distribution as a measure of wage income inequality; and show that a comparative static effect may force the skilled-unskilled relative wage and the Gini-Coefficient of wage income distribution to move in opposite directions in the presence of unemployment.     

Political‐Economic Regime and the Wage Curve: Evidence from Chile, 1957–96

This paper tests whether a wage curve—a negative relationship between the level of unemployment and the level of pay—existed in Chile during 1957–96. The analysis is divided into two periods. For 1957–73, during inward‐led development, we reject the existence of a wage curve. For 1974–96, when the economy opened, state‐run industries were privatised and labour rights weakened, we find a wage curve of ?0.08. Based on this finding we conclude that the unemployment–pay elasticity in the post‐reform period is similar to the ?0.07 to ?0.10 wage curve found in other western, capitalist countries. Disaggregating the analysis by group, we find that women, non‐university educated workers and public sector workers have suffered more from unemployment. Yet informal sector workers have not experienced pay drops as a result of unemployment, contradicting the hypothesis that the informal sector acts as a buffer during economic downturns.     

Trade,capital accumulation and structural unemployment: an empirical study of the Singapore economy

This paper studies the factors responsible for the secular decline of Singapore's unemployment rate over the period 1966-2000 in an environment of low and stable inflation rates. We introduce wage bargaining and unions into a specific-factors, two-sector economy with an export sector and a non-tradable sector to obtain an endogenous natural unemployment rate. Increases in the relative export price and capital stock in the export sector are predicted to reduce structural unemployment. These hypotheses could not be rejected based on structural estimations and co-integration regressions. Empirically, capital accumulation in the export sector explains most of the decline in Singapore's unemployment rate.     

Wage Cyclicality and Composition Bias in the Norwegian Economy*

Using employer–employee register data, I estimate the real wage semi-elasticity of aggregate unemployment for the years 1997–2014 in the Norwegian private sector. An increase of 1 percentage point in aggregate unemployment is associated with an average decrease of 2 percent in (total) daily wages. Although Norway has influential labor market institutions, wages in the Norwegian private sector are quite sensitive to business-cycle fluctuations. Gender differences in wage cyclicality and compositional variation are considerable. Men have significantly more procyclical wages than women, and appear more likely to upgrade procyclically to better-paying firms.     

Impact of international trade under dual labor markets

A country's unemployment rate can be affected by technology choice and the opening of international trade. This general equilibrium model examines the impact of international trade with the presence of dual labor markets in which manufacturing firms engage in oligopolistic competition and choose technologies with different marginal and fixed costs to maximize profits. In a closed economy, it is shown that an increase in labor market efficiency or a population increase induces manufacturing firms to adopt more advanced technologies and the wage rate in the manufacturing sector increases. With the existence of a continuum of technologies, technology choice is not a source of firm heterogeneity. The opening of international trade leads to an increase in the wage rate in the manufacturing sector and the price of the agricultural good. When countries are identical, international trade always increases national welfare.     

Downsizing, wage inequality and welfare in a developing economy

This paper focuses on the cost cutting effects of firm downsizing in a developing economy. Using a dualistic production structure to depict a developing economy, the impacts of downsizing on wage inequality and social welfare are examined. Downsizing is revealed to not only narrow the wage gap between skilled and unskilled labor but also to raise the level of manufactured output and reduce the unemployment ratio in the urban sector. These effects improve the social welfare of the economy.     

Factor‐biased public infrastructure and wage inequality

This paper analyzes how factor‐biased public infrastructure affects the skilled–unskilled wage inequality. In the basic model with a full employment economy, we find that when the weighted dependence of skilled labor and capital in the urban skilled sector on public infrastructure is large enough relatively to that of unskilled labor and capital in the urban unskilled sector, the wage inequality will be expanded. We also discuss labor‐biased and capital‐biased public infrastructure in our framework, and find that the relative dependences of relevant labor or capital on public infrastructure are important determinants of wage inequality. In the extended models, we analyze separately the issue of wage inequality in the economy with unemployment and the totally open capital market, and find the results of the basic model almost still hold.     

Unemployment and Economic Integration for Developing Countries

While financial or trade integration between countries may increase the size of the market and aid the adoption of more advanced technologies, will it also increase the level of urban unemployment for a developing country? In this model, there is unemployment in the urban sector. Manufacturing firms engage in oligopolistic competition and choose increasing returns technologies to maximize profits. Financial firms provide capital to manufacturing firms and they also engage in oligopolistic competition. We show that an increase in the wage rate in the manufacturing sector changes neither the level of technology nor the level of employment in the manufacturing sector. While financial or trade integration between developing countries leads manufacturing firms to adopt more advanced technologies, the level and rate of employment in the manufacturing sector will not deteriorate.     

INFLOW OF FOREIGN CAPITAL AND TRADE LIBERALIZATION IN A MODEL WITH AN INFORMAL SECTOR AND URBAN UNEMPLOYMENT

Abstract.  The paper has made an attempt to analyse the effects of liberalized trade and investment policies on welfare and open unemployment in a developing economy in terms of a three sector Harris-Todaro type general equilibrium model. Following empirical evidence it is assumed that there is wage rigidity in urban sectors, which leads to the simultaneous existence of open unemployment and an urban informal sector in the migration equilibrium. The paper deserves special attention for its interesting results which are completely opposite to those generated by the standard Harris-Todaro model.     

Environmental Goods and Measures for Their Promotion: An Analysis Using a Fair Wage Model

In this paper, we model a two‐sector small open economy with emissions and unemployment associated with the fair wage effort hypothesis, and investigate the environmental and employment impact of an emission tax, a subsidy for purchasing environmental goods in the downstream polluting industry, and a subsidy to the upstream eco‐industry. We then show that if the eco‐industry is skilled labor intensive relative to the polluting final goods industry, while a subsidy for purchasing environmental goods decreases the unemployment rate of unskilled labor, it may increase total emissions. In contrast, the emission tax and the subsidy to eco‐industry firms worsen the unemployment rate, though both policies decrease total emissions. Hence, if the emission tax is set equal to the marginal environmental damage, and either a downstream or upstream subsidy is used to mitigate unskilled unemployment, the optimal subsidy to purchase the goods is positive whereas the optimal subsidy to the eco‐industry is negative, i.e., a tax on the eco‐industry.     

Monopolistic Competition and North–South Trade

This paper examines the consequences of opening to international trade for a developing economy with open urban unemployment and rural–urban migration, where the urban sector is monopolistically competitive. It is shown that there exists a threshold level of urbanization prior to which increases in product variety will be reflected in increased urban unemployment, that opening to intra‐industry trade with a high‐wage economy (i.e. North–South trade) will reduce the rate of urban unemployment by a greater amount than intra‐industry trade with a similar economy, and that trade intervention in the South may lower welfare by reducing varieties produced in the North.     

UNEMPLOYMENT,LABOR MARKET TRANSITIONS,AND RESIDUAL WAGE DISPERSION

It is commonplace in the debate on Germany's labor market problems to argue that low wage dispersion is a major reason for the high unemployment rate. This paper analyzes the relationship between unemployment and residual wage dispersion for individuals with comparable attributes. In the conventional neoclassical point of view, wages are determined by the marginal product of the workers. Accordingly, increases in union minimum wages result in a decline of residual wage dispersion and higher unemployment. A competing view regards wage dispersion as the outcome of search frictions and the associated monopsony power of the firms. Accordingly, an increase in search frictions causes both higher unemployment and higher wage dispersion. The empirical analysis attempts to discriminate between the two hypotheses for West Germany analyzing the relationship between wage dispersion and both the level of unemployment as well as the transition rates between different labor market states. The findings are not completely consistent with either theory. However, as predicted by search theory, one robust result is that unemployment by cells is not negatively correlated with the within‐cell wage dispersion.     

Trade liberalization,firm entry,and income inequality

This paper examines the short‐ and long‐run effects of trade liberalization via tariff reductions on income inequality in an economy, which is characterized by an imperfectly competitive urban manufacturing sector and a perfectly competitive rural agricultural sector. Tariff reductions reduce domestic output in the importable urban manufacturing sector, leading to shifts of capital from the urban sector to the rural agricultural sector. This can narrow the wage gap between skilled and unskilled labor in the short run. However, the lowered capital cost attracts new firms, and subsequently excessive entry of firms, to the urban manufacturing sector. This firm entry effect can mitigate the favorable effect of tariff reductions on wage inequality in the long run. Empirical study confirms the findings.     

Labour Taxation in a Unionised Economy with Home Production

The impact of payroll taxes on unemployment and welfare are examined in a model with household production and union–firm wage bargaining. The analysis shows that unemployment typically falls as the payroll tax rate in the market sector for household substitutes (the service sector) is reduced. This holds even when the payroll tax rate in the non-service sector is raised in order to maintain a balanced government budget. Welfare improves with a reduced-service-sector payroll tax rate only if unions are equally strong and firms are equally labour intensive across the sectors.
JEL classification : E 24; H 21; J 22; J 51     

Another Look at Wage Distortion in a Developing Dual Economy

The paper focuses on an endogenous wage distortion in a developing dual economy where an efficiency wage in the urban sector triggers rural-urban migration. Because of the endogenous nature of the distortion, this migration reduces the severity of distortion by creating more jobs and reducing the actual wage differential between the sectors. These results are in sharp contrast to the outcomes of an exogenous wage distortion (minimum wage) where rural-urban migration increases the severity of unemployment and calls for costly policy mechanisms that might be either politically or economically difficult to implement. Furthermore, in contrast to the case of an exogenous distortion, interregional migration with endogenous wage distortion increases urban industrial output and structural transformation works its way into the development process. This structural transformation is maintained even when this dual economy engages in the production of non-traded goods. Although this paper does not engage in policy ranking to bring in zero unemployment equilibrium, it shows that it is possible to achieve socially desirable level of migration by influencing detection rate of shirking or disutility of work effort instead of using costly distributive parameters such as taxes and subsidies.     

Unemployment,Wage Inequality and International Factor Movement in the Presence of Agricultural Dualism

This paper investigates how the international factor movements affect the unemployment and skilled–unskilled wage inequality with the existence of a modern agricultural sector. Our research has the new feature that we not only consider that the rural labor migrates to the urban sector but also to the modern agricultural sector. The main conclusions are that the unskilled labor outflow certainly decreases the wage inequality and unemployment rate and the influences that skilled labor movement and capital inflow have on wage inequality and unemployment rate are dependent on the factor intensity between the urban and modern agricultural sectors.