Labour Market Flexibility,Wages and Incomes in Sub‐Saharan Africa in the 1990s

Abstract: This paper provides an overview of how African labour markets have performed in the 1990s. It is argued that the failure of African labour markets to create good paying jobs has resulted in excess labour supply in the form of either open unemployment or a growing self‐employment sector. One explanation for this outcome is a lack of labour market ‘flexibility’ keeping formal sector wages above their equilibrium level and restricting job creation. We identify three attributes of labour market flexibility. First, whether real wages decline over time; secondly, the tendency for wages to adjust in the face of unemployment; and thirdly, the extent of wage differentials between sectors and/or firms of various size. Recent research shows that real wages in Africa during the 1990s may have been more downwardly flexible than previously thought and have been surprisingly responsive to unemployment rates, yet large wage differentials between formal and informal sector firms remain. This third sense of the term ‘inflexibility’ can explain a common factor across diverse African economies — the high income divide between those working in large firms and those not. Those working in the thriving self‐employment sector in Ghana have something in common with the unemployed in South Africa — both have very low income opportunities relative to those in large firms.     

Product market competition, job security, and aggregate employment

Standard economic wisdom generally stresses the benefits ofincreased competition on the product market. This paper proposesa model of monopolistic competition with an endogenous determinationof workers flows in and out of unemployment, where wages aredetermined according to an efficiency wage mechanism. We showthat an increase in product market competition boosts the hiringrate as well as the separation rate thus reducing job security.Hence, the efficiency wage schedule compatible with more competitionshifts upward. An adverse effect on workers' incentive is atwork which pushes real wages up to the point that increasedcompetition may indeed generate employment losses rather thangains.     

Labor market concentration and heterogeneous effects on wages: Evidence from Japan

This study provides empirical evidence of the impact of labor market concentration on wages. We find that (1) wages are suppressed in more concentrated labor markets, (2) labor rigidity is associated with wage responsiveness to labor market concentration, (3) the impact of labor market concentration on wages is smaller for firms with more competitive downstream product markets, and (4) greater job opportunities outside the manufacturing sector weaken the relationship between concentration and wages. In sum, our findings indicate that labor rigidity and the degree of competition in downstream product markets, as well as outside options, affect the relationship between market concentration and wages.     

Economic and Social Security: The Role of the EU

This lecture addresses the issue of growing inequality of labour incomes in the EU. In this lecture, it is observed that through higher unemployment at downward rigid wages, the market position of low-skilled workers has deteriorated over the past quarter-century in Western Europe and that European countries have failed to develop an efficient instrument of income insurance on behalf of low-skilled workers. Wage subsidies are such an instrument. Furthermore, it is argued that labour market integration in an economic union like the EU entails externalities, resulting in underprovision of insurance and that coordination or matching grants could overcome this second inefficiency. On these empirical and theoretical grounds, this article proposes the organisation at EU level of a scheme of matching grants for low-skilled labour, whereby a share of national wage subsidies to low-skilled labour would be financed by the EU under suitable funding.     

Sectoral Wage Rigidities and Labour and Product Market Institutions in the Euro Area

We estimate wage Phillips curve relationships between sectoral wage growth, unemployment and productivity in a country-industry panel of euro area countries. We find that institutional rigidities – such as labour and product market institutions and regulations – limit the adjustment of euro area wages to unemployment, in both upturns and downturns, particularly in manufacturing and, to a lesser extent, in the construction and service sectors. In addition, there are further limitations in the response of wages to changes in unemployment during economic downturns which suggests that euro area wages are also characterised by significant downward wage rigidities, especially in the manufacturing sector. These results are robust to specifications that account for factors that may affect structural unemployment (such as duration-dependent unemployment effects), as well as changes in the skill composition of employment that may affect the evolution of aggregate wages. The results also hold for panels including or excluding the public sector (where wages may be determined differently to the private sector also due to the effects of fiscal consolidation on public sector wages during the crisis). From a policy perspective, reforms in product and labour markets which reduce wage rigidities can facilitate employment growth and enhance the rebalancing process in the euro area.     

Wage misalignment in CFA countries: were labour market policies to blame?

Wage rigidity, stemming from highly distortive labour marketpolicies, is a natural candidate to explain the overvaluationof the CFA franc after the adverse external shocks of the 1980s.This paper uses a variety of data sources to assess wage rigidityin CFA countries until the 1994 devaluation, and to analysewhether it was due to labour market policies. The paper showsthat wages were high in CFA countries, compared with both wagesin similar countries and the labour earnings of similar individualswithin the same countries. It also shows that wages were rigidin real terms, in the sense of following closely the fluctuationsof government wages and consumer prices, but it finds no evidenceof nominal wage rigidity, though. From an international perspective,minimum wages were not high enough to account for the observedwage misalignment. Moreover, their adjustment over time washighly responsive to real shocks. Private sector unions, inturn, seemed more instrumental in achieving wage moderationthan wage drift. Their members usually had lower wages thansimilar, non-unionised workers, which probably reflects the'subordinate' nature of the labour movement. The most likelycandidates to explain wage misalignment and real rigidity inCFA countries in the 1980s and early 1990s are therefore governmentpay policies and (possibly) limited competition in product markets.     

Sticky Swedes and flexible Finns: manufacturing labour markets in Finland and Sweden during the Great Depression

ABSTRACT

Nominal wage stickiness is a popular explanation for the greatness of the Great Depression. According to the sticky-wage explanation, the slow adjustment of nominal wages raised real wages above the market-clearing level, causing a reduction of output and labour, thus increasing unemployment. Explanations for nominal wage stickiness are usually sought within the labour-market institutions and their changes after the First World War. This paper examines the role of labour-market institutions by comparing manufacturing labour markets in Finland and Sweden. These two countries had quite similar economic structures, trade patterns, and exchange rate policies, but different systems of industrial relations. Results indicate that stronger trade unions and collective bargaining made nominal wages stickier in Sweden, while in Finland, where collective agreements did not exist, unions were weaker, and wage adjustment was more flexible. As a result, real product wages rose in Sweden but fell in Finland. This created in Sweden stronger pressure for reducing labour input than in Finland. Our results show on one hand that labour market institutions clearly influenced the course of the Great Depression, but on the other hand that they alone do not explain the different economic outcomes during the depression and the recovery.     

The impossibility of underemployment with more than one product market

We investigate the link between 'underemployment at all wages'and income feedback effects due to firms' activities in an economywith imperfect competition in the product markets. The sizeof income feedback effects negatively depends on the numberof product markets. We strengthen a previous result demonstratedin an overlapping generations model with inelastic price expectations:underemployment at all wages may only exist when the economycontains a single product market, i.e., when firms integrateall feedback effects in their programs.     

Nominal versus real wage rigidity in a monopoly union: A synthesis

Based upon a monopoly union model, this paper addresses how the degree of money illusion of the union member and the indexation rule of unemployment benefits are interdependent in governing the possibility of either nominal or real wage rigidity. Two main findings emerge from the analysis. First, nominal wage rigidity is present unless union members are characterized by complete money illusion and the government does not adjust its nominal unemployment payments. Second, real wage rigidity holds if union members are free of money illusion and nominal unemployment benefits are fully indexed to either union-set wages or the product price.     

The Effects of Labor Markets and Income Inequality on Crime: Evidence from Panel Data

We estimate a model of crime using panel data for the U.S. We focus on the role of labor markets, income distribution, and demographics on property crime. We find strong evidence that favorable labor market conditions have a significant negative effect on property crime. We further test this result using sector-specific wages and find that crime is most elastic with respect to wages in sectors that use low-skilled labor. We also find that income inequality has no significant effect on crime and that the proportion of young males in the population has a significant positive effect on crime.     

Migration: A theoretical comparison on countries’ welfare

We compare the effects of migration on the production of public goods, on income taxes, and on the welfare of residents in the sending and receiving countries. Migration is driven by income differences between countries. Alternative wage adjustment scenarios are considered: fully flexible wages, upward rigidity, and unemployment. We show that in all scenarios, emigration is detrimental to welfare for the origin country. Migration improves welfare for the destination country in the presence of flexible wages and upward rigidity, but it has detrimental effects in the presence of unemployment.     

Wage Gaps Large and Small

The law of one wage does not strictly hold, nor should it be expected to hold, in contemporary labor markets. The law of one wage, however, provides a surprisingly good first approximation of the structure of U.S. wages. This generalization is drawn from research on a diverse set of topics: the Mincerian wage equation and earnings imputation, union wage differentials, product market regulation and the labor market, wages in male and female jobs, the wage effects of military service, and interarea wages and cost of living.     

The macroeconomic effects of immigration: Israel in the 1990s

The Macroeconomic Effects of Immigration: Israel in the 1990s. — The authors perform counterfactual simulations using an econometric model to estimate the macroeconomic effects of immigration in Israel. The model takes account of immigrant assimilation in labor and housing markets. They argue that wage flexibility was the key to success in immigrant absorption. In addition, the animal spirits of entrepreneurs consolidated this success. House prices, GDP, consumption, investment, unemployment and imports would have been considerably lower but for the immigration, while real wages would have been higher. The main beneficiaries were capitalists owning housing and businesses. The main losers were workers who were not owner-occupiers.     

Institutional wage-setting,labour demand and labour supply: Causal estimates from a South African pseudo-panel

Unemployment in South Africa has multiple causes. This article uses a district pseudo-panel to estimate the elasticity of labour demand, labour supply and unemployment with respect to wages. We assess whether hiring decisions are more sensitive to increases in wages of low-paid workers than high-paid workers, and whether wage growth prompts entry into the labour market. These channels combine to result in the positive causal effect of wage growth on unemployment. The research investigates whether these effects are dominated by districts in which unionisation rates are high and employment is concentrated in large firms. Wage growth of middle-paid to highly paid workers – as opposed to low-paid workers – reduces local labour demand and raises local unemployment. Bargaining arrangements correspond closely to the spatial wage distribution; in turn, a large part of the impact that wage growth has on labour market outcomes is determined by these wage-setting institutions.     

Wage Dynamics and Racial and Ethnic Occupational Segregation Among Less-Educated Men in Metropolitan Labor Markets

We assess whether occupational segregation in metropolitan labor markets is associated with the wages of, and contributes to racial/ethnic wage disparities among, less-educated men. To measure occupational segregation in metropolitan low wage markets, we create a segregation index measuring segregation between white, black, and Latino male high school-only educated workers and high school dropouts in 95 metropolitan labor markets utilizing a unique dataset of the structural characteristics of the ninety-five largest US metropolitan labor markets. We use regression, fixed effects, and generalized least squares estimation techniques to test whether this index is associated with wages and racial wage inequality among these men. The analyses reveal that in metropolitan labor markets characterized by more racial and ethnic segmentation in the low wage market, wages are lower among black and Latino men in particular, and racial-ethnic wage disparities among similarly less-educated white, black, and Latino men are higher.     

WAGES THROUGH BOOMS AND RECESSIONS: A CASE STUDY OF ZIMBABWE

This paper examines developments in the wage system in Zimbabwe. The analysis focuses on the wage formation process and wage differentials. The paper observes that real wages have been flexible and have fallen sharply. Wage inflexibility is thus ruled out as a cause of unemployment. The collapse of wages has given rise to non‐standard labour market practices as workers try to cushion themselves against rapid wage declines. Wages also exhibit wide gender, racial and occupational differentials. The paper also argues that a wage policy in Zimbabwe must be pillared on decentralised, coordinated and synchronised collective bargaining.     

Wage Divergence and Asymmetries in Unemployment in a Model with Biased Technical Change

In an attempt to explain the different wage and unemployment responses in mainland Europe and the US to a fall in demand for low-skilled labour, we present a model with two levels of skills and two classes of goods. We analyse the response to skill-biased technical change in two distinct labour market regimes. A trade-off between wage divergence and unemployment of skilled and unskilled workers occurs. Skill-biased technical change turns out to have a different impact in both regimes, due to a different working of the chimney effect.     

Economic geography and inequality in China: Did improved market access widen spatial wage differences?

New economic geography (NEG) models predict that costly transport and the spatial distribution of demand affect the profits firms can earn in different locations, leading to higher wages for workers employed in cities with better geographic access to markets. In light of the ongoing economic integration and market reforms that occurred in China after 1995, we use three waves of Chinese Household Income Project (CHIP) data to measure the extent to which the influence of market access on wages changed and affected wage dispersion across Chinese cities over the next 12 years. Employing the gravity-based method of Redding and Venables (2004) to calculate the market access available to firms located in each city, we test whether the elasticity of the wage with respect to local market access increased over time. We find that in all three years market access of the worker's location has a positive and significant influence on the wage. Consistent with extensive labor market reforms of the late 1990s, the estimated wage elasticity doubles between 1995 and 2002 and is stable thereafter. Our estimates indicate that wages of all workers become more responsive to market forces in a manner consistent with NEG predictions, both skilled and unskilled and those working for state as well as private enterprises. We also provide evidence that these results are not driven by omission of other forms of agglomeration or by selection bias. Estimated spatial differences in nominal wages are large: a worker moving from an inland location to the coast in 2007 would have doubled his or her nominal wage. Counterfactual analysis indicates that spatial differences in market access contribute to wage inequality, but less so over time.     

The changing fortunes of an aristocracy? Determinants of wages and conditions of employment in Kenya

This article examines the functioning of the labour market in the modern sector in Kenya and, in particular, considers the determinants of wages and other conditions of employment. An analysis of negotiated wages from collective agreements signed during 1974–75 suggests that measures of an ‘ability to pay’ characteristic of industries with limited competition in the product market and realizing above-average labour productivity are the best predictors of inter-industry wage differences. Locational and ownership variables are also found to be significant. Size of labour force is only significant for clerical wage rates. Four case studies suggest superior conditions of employment are positively associated with higher than average wages.     

A Classroom Unemployment Compensation Experiment

This classroom experiment demonstrates how unemployment compensation can affect unemployment rates and wages. Students take the roles of workers and employers who use double oral auction labor markets to negotiate employment contracts. The instructor takes the role of a government that offers progressively higher levels of unemployment compensation. The experiment generates data that students can analyze to test the general predictive power of economic theory. Students also use their data to test the specific hypothesis that higher unemployment compensation increases the unemployment rate and causes wage compression.