On Tax Over-Shifting in Wage Bargaining Models

It has frequently been noted in the wage bargaining literature that increasing average labour taxes may in fact be over-shifted in the pre-tax wage that is negotiated between unions and firms, raising workers post-tax wages. In this paper, we study the precise conditions for such tax over-shifting to occur under both Nash and Right-To-Manage bargaining structures, and considering both competitive and imperfectly competitive output market conditions. In the case of competitive output markets, we derive and interpret the conditions for over-shifting to occur and show that they hold for an entire class of commonly used production functions. Moreover, under monopolistically competitive output markets we show that tax over-shifting will occur when the firm has sufficient market power. The conditions on the production function, that were necessary and sufficient for tax over-shifting to occur under perfect competition, are shown to be no longer necessary. These findings hold for all bargaining structures considered.

Fiscal Leadership and Coordination in the EMU

We analyze the role of fiscal-monetary policy interactions and fiscal coordination in EMU under the assumption of strategic wage setting in unionized labour markets. We find that production subsidies and real wage distortions are strategic complements. The literature on macroeconomic stabilisation policies and policy games usually neglects this point and reaches overoptimistic conclusions about the desirable effects of accommodating fiscal policies. Central bank preferences also affect the desirability of fiscal coordination in a monetary union. In fact, contrary to Beetsma and Bovenberg (1998), we find that fiscal coordination improves outcomes in the case of a conservative central banker, whereas it leads to worse outcomes with a populist one.

Privatization and Labor Cost Savings: Evidence from Health Care Services

This study examines whether privatization is associated with low public sector health care wages and with low probability of public sector employment for health care providers. Findings suggest that privatization contributes significantly to low wages of union health care providers in the public sector. Privatization also contributes to a low probability of public sector employment in this industry, especially to unionized workers. These results indicate that competition enhancing policy can promote lower labor costs even in a service sector that employs a highly skilled work force.

Economic,Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council

The paper reviews the arguments for and against monetary union among the six members of the Gulf Cooperation Council—the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. Both technical economic arguments and political economy considerations are discussed. I conclude that there is an economic case for GCC monetary union, but that it is not overwhelming. The lack of economic integration among the GCC members is striking. Without anything approaching the free movement of goods, services, capital and persons among the six GCC member countries, the case for monetary union is mainly based on the small size of all GCC members other than Saudi Arabia, and their high degree of openness. Indeed, even without the creation of a monetary union, there could be significant advantages to all GCC members, from both an economic and a security perspective, from greater economic integration, through the creation of a true common market for goods, services, capital and labour, and from deeper political integration. The political arguments against monetary union at this juncture appear overwhelming, however. The absence of effective supranational political institutions encompassing the six GCC members means that there could be no effective political accountability of the GCC central bank. The surrender of political sovereignty inherent in joining a monetary union would therefore not be perceived as legitimate by an increasingly politically sophisticated citizenry. I believe that monetary union among the GCC members will occur only as part of a broad and broadly based movement towards far-reaching political integration. And there is little evidence of that as yet.

Implications of Monetary Union for Catching-up Member States

We examine the implications of monetary union for macroeconomic stabilization in catching-up participating countries. We allow member states’ supply conditions to differ, especially with regard to sectoral characteristics. Sectoral productivity shocks of the type associated with the Balassa–Samuelson effect tend to hamper the stabilization properties of a currency union. In the face of aggregate supply disturbances, the stabilization costs of renouncing monetary autonomy diminish with a steeper supply curve (as induced by higher trade openness) and—barring idiosyncratic shocks—with a larger reference country size, more homogeneous supply slopes and a higher preference for price stability.

Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve

In this paper we apply a static version of a New Keynesian macromodel to a monetary union (see Bofinger et al., J Econ Educ, 37:98–117 (2006), Walsh, J Econ Educ, 33:333–346 (2002)). We show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents national interest rates from driving a wedge between macroeconomic outcomes across member states. In particular small countries are in need for fiscal policy as an independent stabilization agent with room to breath.

Connecting National Safety Nets: The Dialectics of the Basel II Contracting Process

Basel II consists of supervisory guidelines negotiated by representatives of central banks and national regulatory commissions that were members of the Basel committee on Banking Supervision (BCBS). The BCBS is itself a regulatory response to globalization, which is connecting national safety nets in market-driven ways. A country’s financial safety net is a social contract established by short-lived agents for principals in long-lived economic sectors. Restraints placed on the authority of the BCBS members to contract for their principals by domestic politics explains: why Basel II authorizes individual countries to implement the agreement in markedly different ways; why US implementation of Basel II ran into so much doubt, controversy, and delay; and how the implementation debate set small and large banks and the Federal Reserve and other federal regulators against one another.

Foreign Direct Investment Liberalization Between Canada and the USA: A CGE Investigation

In this paper, we develop a computable general equilibrium (CGE) model to shed quantitative light on the implications of a scenario of deeper economic integration between Canada and the United States, where the barriers for foreign direct investment are preferentially eliminated. Our model distinguishes between the activities of domestic and foreign-owned firms at the microeconomic level, both in terms of demand and production characteristics. Overall our findings suggest that further investment liberalization between the two countries will accelerate the shaping of Canada’s industrial structure, as manifested by recent trends.

Public Spending Management and Macroeconomic Interdependence

This paper studies the domestic and international effects of “public competition policies” aimed at improving the efficiency of public spending. Such measures are modeled as an increase in the price elasticity of public consumption. The paper finds that public competition policies significantly affect macroeconomic interdependence across countries, both through the impact of the international elasticity of substitution and of mark-up effects. The paper also develops an extension in which fiscal shocks are stochastic. In welfare terms, countries with a larger government sector have an incentive to promote global public competition policies regardless of whether fiscal policy is modeled as deterministic or stochastic.

Can the HOSS framework help shed light on the simultaneous growth of inequality and informalization in developing countries?

Using simple, modified versions of the factor proportions framework, and focusing on structural features within developing economies, this paper attempts to reconcile puzzling developments observed in many post-reform, post-liberalization countries whereby increasing income inequality has emerged side-by-side with informalization of the economy. Measures undertaken to enhance public sector efficiency and attract investment in an import-intensive export sector may increase rental–wage and skilled–unskilled wage gaps, contra the predictions of the simple Heckscher–Ohlin–Stolper–Samuelson (HOSS) framework regarding skill- and capital-scarce countries. The common thread generating our interesting results is the presence of sectors that are even more labor-intensive than those producing traded goods.

Evaluating China’s Integration in World Trade with a Gravity Model Based Benchmark

This paper assesses China’s “natural” place in the world economy with a new set of trade integration indicators, which are used as a benchmark in order to examine whether China’s share in international trade is consistent with fundamentals such as economic size, location and other relevant factors. They constitute a better measure of trade integration that incorporates many more factors than traditional openness ratios. The model tracks international trade well and confirms that China is already well integrated in world markets, particularly with North America, several Latin American and East Asian emerging markets and most euro area countries.

The Portuguese Economy in the Irish Mirror, 1960–2004

The deepening of economic and financial integration in the European Union has led to different responses in the group of ‘cohesion’ countries. Ireland and Portugal stand out as the two extreme examples, as Ireland caught-up to the forerunners after the launching of EMU, in 1992, whereas Portugal lost ground. This paper looks at structural shifts in order to explain different economic performances within Europe. We conclude that Portugal’s labour productivity lag was the outcome of a less favourable structure of employment; that differences in the structure of employment are not clustered in specific industries; and that such structural differences are associated with different factor endowments, namely physical and human capital. Portugal has a rising competitiveness problem in international markets as real wages have increased faster than labour productivity in the 1990s. That has to be changed by policy measures, by the market through higher levels of unemployment, or by a combination of both.

Wage vs. industry subsidies: coping with technology related unemployment in a globalized economy

In the past, economic policy has largely adopted a sectoral approach to technology-related unemployment. More recently though, wage subsidies have gained attention as an alternative means of reemployment, with the dispute on how best to cope with unemployment still unsettled. However, despite the fact that results may differ, research mostly assumed a closed-economy setting. Based on a HOS model with factor-augmenting technical change and labor-market rigidities, the paper examines the differences of these two subsidization schemes on output and employment. Since both schemes work through different channels, namely the demand versus the supply side, effects differ not only in magnitude. The paper includes a comparative calibration exercise for the case of Germany.

The takeover and selection effects of foreign-owned establishments: an analysis using linked employer–employee data

We provide the first estimates of the effect of foreign ownership on wages in Germany, controlling for the observed and unobserved characteristics of workers and plants. We also test whether the wage gains from joining a foreign-owned firm are subsequently lost when leaving that firm, and we examine whether wage gains vary across the sample. We find large selection effects in terms of worker and plant components of wages. Once the selection effect is taken into account, the takeover effect is small and in some cases insignificantly different from zero.

Trade policy and specialization in developing countries

This paper examines the impact of trade policy on specialization patterns in ten Latin American countries over the period 1985–1998. These countries are natural case studies because in the last decades they implemented comprehensive trade liberalization programs, both generally and preferentially, starting from relatively high tariff protection levels. Our econometric results suggest that reducing own most favored nation tariffs is associated with increasing manufacturing production specialization. Furthermore, we find that preferential trade liberalization and differences in the degree of unilateral openness have resulted in increased dissimilarities in manufacturing production structures across countries. These results are robust across specialization measures and estimation methods.

The choice of inflation targeting—an empirical investigation

A growing number of countries have anchored their monetary policy to an explicit numerical rate or range of inflation since such an inflation targeting framework was first adopted by New Zealand in 1989. This paper empirically investigates economic structure and institutional factors associated with a country’s choice of inflation targeting using a dataset of 66 countries for the period of 1980–2000. It is found that a sound fiscal position is significantly and positively associated with the choice of inflation targeting framework; the central bank is more likely to adopt inflation targeting with greater financial depth; institutional capacity including central bank autonomy and flexible exchange rate regime is important for the choice of inflation targeting.

Currency Unions: Some Lessons from the Euro-Zone

Whilst there are many sizeable benefits from currency union, the main disadvantage is often the difficulty of adjusting to an asymmetric shock. Such adjustment is easier when the separate countries (regions) in such a union have flexible labour markets, and when there is a federal fiscal system to ease the adjustment process. The euro-zone has neither. We show that the trends in relative unit labour costs have in several recent cases been worsening relative competitiveness, thereby putting the euro-zone under greater centrifugal pressure. Nevertheless the costs of ‘exit’ are so high that it would only probably occur as a consequence of political mis-calculation.

Whither A Currency Union in Greater China?

The paper attempts to evaluate the prospect of creating a currency union in the “Greater China” economic area. Despite of the political deadlock and military confrontation in the Taiwan Strait, the Greater China area has experienced rapid and spontaneous regional integration in the past decades as a result of increasingly cross-border trade, foreign direct investment (FDI), technology contracts, and other arrangements in accordance with changes in comparative advantage and industrial upgrading in these economies. In this study, we focus on the symmetry in shocks that is perceived as one of the major preconditions of a currency union. In contrast to the previous studies, we investigate the time-varying correlation of supply, REER and monetary shocks by using the Kalman filter technique to assess the dynamic changes in structural similarity and convergence among the Greater China economies. We also examine the costs of forming a currency union in the area due to the loss of monetary autonomy in each economy. Our results suggest that there is a rising structural symmetry between the Greater China economies, and this area has become increasingly a better candidate for a monetary union.

Policy coordination in East Asia and across the Pacific

In this paper, we construct a macro-econometric model that describes the economic activity in the Asia-Pacific area and provide quantitative insights into the recent policy debates on monetary and currency coordination among the East Asian economies. The model includes a wide variety of monetary and currency policy rules that the East Asian economies adopt and allows for one country's policymaking to have substantial effects on foreign countries. We apply the model to three current policy issues: (1) the desirability of currency basket pegs in East Asia, (2) the anticipated effects of China's currency policy reform, and (3) the non-negativity constraint on Japanese nominal interest rates. The simulation analyses show the external economy effects of policy rules quantitatively and suggest the difficulty of monetary and currency policy coordination among the East Asian economies.

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