Labour Market Policies and Long-term Unemployment in a Flow Model of the Australian Labour Market

This paper develops a general equilibrium job matching model, which is used to assess the impact of active labour market policies, reductions in unemployment benefits and reductions in worker bargaining power on long-term unemployment and other key macro variables. The model is calibrated using Australian data. Simulation experiments are conducted through impulse response analysis. The simulations suggest that active labour market programs (ALMPs) targeted at the long-term unemployed have a small net impact and produce adverse spillover effects on short-term unemployment. Reducing the level of unemployment benefits relative to wages and worker bargaining power have more substantial effects on total and long-term unemployment and none of the spillover effects of ALMPs.     

The NAIRU reconsidered: why labour market deregulation may raise unemployment

According to the mainstream theory of equilibrium unemployment, persistent unemployment is caused mainly by ‘excessive’ labour market regulation, whereas aggregate demand, capital accumulation and technological progress have no lasting effect on unemployment. We show that the mainstream non‐accelerating inflation rate of unemployment (NAIRU) model is a special case of a general model of equilibrium unemployment, in which aggregate demand, investment and endogenous technological progress do have long‐term effects. It follows that labour market deregulation does not necessarily reduce steady‐inflation unemployment. Theoretically, if the decline in real wage growth claims owing to deregulation is smaller than the ensuing decline in labour productivity growth and in the warranted real wage growth, then in that case steady‐inflation unemployment may increase. Empirical evidence for 20 Organisation for Economic Cooperation and Development (OECD) countries (1984–1997) indicates that the impact of labour market deregulation on OECD unemployment is zero, and possibly negative (causing a higher rate of unemployment).     

Profit Sharing,Credit Market Imperfections and Equilibrium Unemployment*

We investigate the interaction between labour and credit market imperfections for equilibrium unemployment in the presence of profit sharing. In a partial equilibrium with exogenous outside options, increased bargaining power of banks has adverse employment effects. In a general equilibrium with endogenous outside options, this relationship is frequently reversed; reduced credit market imperfections increase equilibrium unemployment if the labour market imperfections—measured by the bargaining power of trade unions—are sufficiently strong and the benefit–replacement ratio is sufficiently high. Finally, we show that higher bankruptcy risks increase equilibrium unemployment under similar conditions.     

The British youth labour market in crisis

The paper argues that the British youth labour market is in a crisis with employment falling, unemployment and long-term unemployment rising rapidly. In section one the paper reviews the evidence and, in particular, looks at alternative measures of unemployment duration. Section two discusses various explanations for the growth of youth unemployment and dismisses the view that it is due to the increase in relative wages of young people. It is argued that the youth labour market has several distinctive features that make it more sensitive to cyclical fluctuations. Section three takes a brief look at various policies to alleviate the problem. Section four concludes the paper stressing that a reflation of the economy is necessary to make a significant impact on youth unemployment.     

Unemployment and the Rental Rate of Capital

This paper introduces a standard neoclassical production function in an equilibrium search model of the labour market, in order to analyse the effects that changes in the (exogenous) rental rate of capital have on the unemployment rate. When the number of firms is kept fixed, an increase in the rental rate affects unemployment only through its impact on selectivity, with the direction of the change depending on the size of the worker's unemployment benefits relative to the firm's search costs. Regardless of the behaviour of selectivity, when the number of firms is determined endogenously, an increase in the rental rate always increases unemployment through a process of job destruction.     

Shocks and rigidities as determinants of CEE labour markets’ performance

In this article, the impact of real wage, productivity, labour demand and supply shocks on eight Central and Eastern European (CEE) economies from 1996–2007 is analysed with a panel structural vector error correction model. A set of long‐run restrictions derived from the dynamic stochastic general equilibrium (DSGE) model is used to identify structural shocks, and fluctuations in foreign demand are controlled for. We find that the propagation of shocks on CEE labour markets resembles that found for OECD countries. Labour demand shocks emerge as the main determinant of employment and unemployment variability in the short‐to‐medium run, but wage rigidities were equally important for observed labour market performance, especially in Poland, Czech Republic and Lithuania. We associate these rigidities with collective bargaining, minimum wage, active labour market policies and employment protection legislation.     

Long‐Term Unemployment and the Great Recession: Evidence from UK Stocks and Flows

Long‐term unemployment more than doubled during the United Kingdom's Great Recession. Only a small fraction of this persistent increase can be accounted for by the changing composition of unemployment across personal and work history characteristics. Through extending a well‐known stocks‐flows decomposition of labour market fluctuations, the cyclical behaviour of participation flows can account for over two‐thirds of the high level of long‐term unemployment following the financial crisis, especially the procyclical flow from unemployment to inactivity. The pattern of these flows and their changing composition suggest a general shift in the labour force attachment of the unemployed during the downturn.     

Equilibrium unemployment with outsourcing and wage solidarity under labour market imperfections

We evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high- and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will dampen this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.     

Public Consumption and Unemployment

This paper introduces public consumption—hence the size of the public sector—into an efficiency wage model of the labour market. The effect of a simultaneous rise in taxes and public consumption on unemployment is derived. There arises an unambiguous positive relationship between the size of the public sector and equilibrium unemployment if public and private consumption are substitutes and wages are taxed. The impact of taxes on consumption on unemployment, although in general not equal to zero, is ambiguous.     

Low level equilibrium trap,unemployment, efficiency of education system,child labour and human capital formation

This paper builds an overlapping generations household economy model to examine the impact of adult unemployment on the human capital formation of a child and on child labour, as viewed through the lens of the adult’s expectations of future employability. The model indicates that the higher the adult unemployment rate in the skilled sector, the lesser is the time allocated by an unskilled adult towards schooling of her child. We also find that an increase in the unskilled adult’s wage may or may not decrease child labour in the presence of unemployment. The model predicts that an increase in child wage increases schooling and human capital growth rate only if the adults in the unskilled sector earn less than subsistence consumption expenditure. As the responsiveness of skilled wage to human capital increases, schooling and human capital growth rates increase. The model dynamics bring out the importance of education efficiency and parental human capital in human capital formation of the child. In the case of an inefficient education system, generations will be trapped into low level equilibrium. Only in the presence of an efficient education system, steady growth of human capital is possible. Suitable policies that may be framed to escape the child labour trap are discussed as well.     

Appropriation,migration, and unemployment

This article builds general equilibrium models to explore the relationship among appropriation, rural–urban migration, the minimum wage and unemployment. We find that the proportion of appropriated capital plays a key role in the effects of appropriation on unemployment and rural–urban migration. When the proportion of appropriated capital is large, a stronger control on appropriation by the government results in a lower unemployment rate and more rural–urban migrants, and vice versa. In the extended models, the conclusion may be different when the plundered factor changes from capital to land. In the situation with the agricultural sector employing unskilled labour and capital, appropriation has no impact on unemployment, and the effect on migration remains the same. We also discuss the implications of the minimum wage, and find that under plausible conditions, the rise of the minimum wage can alleviate appropriation and reduce unemployment. The situation of migration is ambiguous due to the impacts of two opposite factors.     

Factor complementarity and labour market dynamics

We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, two of the endogenous mechanisms of the model – factor complementarity and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, deep habits have a smaller but significant role as an endogenous mechanism. Third, capital-augmenting productivity, investment-specific and matching efficiency innovations explain large part of the variation in labour market variables.     

Endogenous job specialization

According to some authors, technical change contributes to the explanation of the increase in equilibrium unemployment by making jobs more and more specialized. Here, we assume that firms optimally adapt the specialization of jobs to overall labour market conditions. Using a matching labour market framework, we show that the increase in unemployment can explain the higher specialization of jobs.     

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.     

The effect of immigration on unemployment in Europe: Does the core-periphery dualism matter?

The migrant crisis is one of the most challenging tasks the EU has ever faced. This paper uses a Panel Error Correction Model to assess the direction of the impact of immigration on domestic unemployment, in the short and in the long run, for a sample of 15 EU countries between 1997 and 2016. We test for different effects in core and periphery countries based on differences in macroeconomic fundamentals and labor market characteristics. In the long run, immigration is found to reduce unemployment in peripheral countries only, whereas in the short run, we find that immigration reduces unemployment for the whole sample. However, country-specific coefficients based on interactions with labour market characteristics indicate that short-run impacts are larger in Scandinavian and Anglo-Saxon countries. Conversely, Italy, Greece and Portugal show the smallest impacts. Our results suggest that negative sentiments toward immigration due to labour market competition are mostly unjustified.     

Reforming Social Welfare in Germany: An Applied General Equilibrium Analysis

Abstract. In this paper, the effects of social assistance reform proposals are discussed for the case of Germany using a computable general equilibrium model that incorporates a discrete choice model of labour supply. This allows us to identify general equilibrium effects of the reforms on wages and unemployment. The simulation results show that general equilibrium wage reactions mitigate labour supply effects and that unemployment in fact decreases. Wage reactions are thus sufficiently strong to prevent additional labour supply from translating into higher unemployment. The simulations indicate that major cuts in welfare payments are necessary to produce substantial employment effects.     

Is a Risk Index Approach to Unemployment Possible?

This paper examines the ways that productivity, personal characteristics such as birthplace and gender, structural factors and labour market history impact on the distribution of the burden of unemployment. It is shown that labour market history is a major explanator of unemployment outcomes in the Australian labour market. The results from the empirical analyses of unemployment outcomes are used to identify individuals at risk of being unemployed. When individuals classified as at risk of being unemployed are followed through time, it is found that they spend considerable time looking for work and have short working spells. This suggests a risk index approach may have considerable merit as a way of identifying the relative difficulty individuals experience in the labour market.     

Benefits and unemployment in an open economy: an equilibrium analysis

This paper examines the relation between uemployment compensation and unemployment in The Netherlands. This relation is studied by menas of a small macroeconomic model for an open economy that assumes equilibrium in the labour market and on the current account. The model yields an elasticity of unemployment to benefits of 1.0, which is high compared to microeconomic research and the outcomes of disequilibrium models for The Netherlands. According to the model, a rise in the ‘wedge’ (i.e. the difference betweenn real labour cost and real net wages) leads to an increase in unemployment, whilst shifting this wedge from the employers to the employees induces a fall in unemployment.     

The Unemployment-Vacancy Relationship in Australia

One of the most important features of the Australian economy in the past two decades has been the structural deterioration of labour market performance, reflected in both an increase in the average rate of unemployment and an outward shift in the Beveridge Curve, which depicts the relationship between unemployment and vacancies. This article attempts to uncover some of the causes for this structural deterioration, in terms of the factors affecting the UVrelationship. We find that the Beveridge Curve shifted out around 1974, consistent with an increase in the equilibrium rate of unemployment which is generally agreed to have occurred around that time. Using gross labour market flow data, we also investigate the determinants of the equilibrium Beveridge Curve in the 1980s. We find that the Beveridge Curve shifted further outwards in the 1980s. The most important determinant of this shift was the decline in the search effectiveness of the unemployed, reflected in the increasing incidence of long-term unemployment. Partially offsetting this influence during this time were the declining labour force participation of men, and the very large increases in female employment.