WHY WAS UNEMPLOYMENT IN POSTWAR BRITAIN SO LOW?*

Why was Unemployment in Postwar Britain So Low? This paper takes a fresh look at the low unemployment in postwar Britain, which is seen as exceptional rather than the norm. During the 1950s and 1960s low unemployment was reconciled with stable inflation through the exercise of wage restraint. Yet the postwar settlement which underpinned this wage restraint also allowed the entrenchment of restrictive practices, which inevitably slowed the growth of productivity and the feasible real wage, thus contributing to Britain's relative economic decline.     

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).     

Unbalanced growth and health care expenditure

Baumol's model of unbalanced growth implies that health care expenditure (HCE) is driven by wage increases in excess of productivity growth. However, it remains unclear whether the HCE in developing countries is affected by the same factor. This paper tests this hypothesis by using China provincial panel data. We show that HCE grows more rapidly if economy‐wide wage growth exceeds productivity growth in China. The results are robust to the use of housing price as an instrumental variable for the economy‐wide nominal wage and the inclusion of real GDP growth, demographic structure, government deficit, pollution emissions and health sector quality as control variables. Furthermore, our findings show that Baumol's cost disease plays a more important role in the less economically developed western regions in which the rural–urban migration is less pronounced.     

Involuntary unemployment,macroeconomic policy,and a behavioral model of the firm: Why high real wages need not cause high unemployment

The perspective of modern macroeconomic theory, be it new classical or old and new Keynesian, is that unemployment can be reduced only if real wages are cut. The modern Keynesians, basing themselves upon the microfoundations of efficiency wage theory, argue that real wages cannot and will not be cut by firms for efficiency wage reasons. This generates involuntary unemployment based on a market coordination problem. A behavioral model that contrasts with efficiency wage theory is presented here which suggests that reducing real wages need not affect the marginal cost of labor and, therefore, the number of individuals employed. In the behavioral model, wherein there exists some linearity in the relationship between real wages and working conditions and labor productivity, a lower real wage rate is not a necessary condition for reducing the unemployment rate nor is a higher real wage an obstacle to reducing it. In this scenario, unemployment, to the extent that it is demand-side induced, is not related to movements in real wages. Therefore, restoring full employment after a negative demand shock becomes a matter for demand management, not demand management that must be coordinated with measures designed to reduce real wages.     

The relation between the speed of demand saturation and the dynamism of the labour market

The purpose of this paper is to examine the medium run effect of the speed of demand saturation on the dynamism of the labour market which involves factors such as the growth of employment and real wage rate, using a computer simulation of the stochastically multi-sectoral pure labour model with a logistic demand function. From the simulation, we obtain the evolutions of the expectation of the employment rate and the real wage rate, supposing three cases where the speed of demand saturation for a product that stochastically emerges is, ceteris paribus, different. As a result, it is demonstrated that the faster growth of demand for a product that emerges stochastically accelerates the growth of employment, but decelerates the growth of real wage rate. The result depends on the heterogeneity of the agents, which is neglected by mainstream economics.     

The Dutch productivity slowdown: the culprit at last?

Two aspects of the recent performance of the Dutch economy (1982–2001) have attracted wide international attention: (1) rapid employment growth and (2) a significant slowdown in labour productivity growth. This paper argues that the shift from a high-productivity, low-employment towards a low-productivity, high-employment growth path constitutes a structural change set off by the policy of low wage growth launched in 1982. Various theoretical perspectives—including neo-classical substitution, induced technological change, vintage and the Verdoorn Law—point to channels through which wage growth restraint may hold back labour productivity growth. Our growth accounting analysis—based on these perspectives—suggests that a substantial part of the Dutch labour productivity growth slowdown can be attributed to the wage growth slowdown.     

How flexible are real wages in EU countries? A panel investigation

We estimate the degree of real wage flexibility in 19 EU countries in a wage Phillips curve panel framework. We find evidence for a reaction of wage growth to unemployment and productivity growth. The degree of real wage flexibility tends to be larger in the central and eastern European (CEE) countries than in the euro area; weaker in downturns than during upswings. There exists an inflation threshold, below which real wage flexibility is low. We also find that a part of the heterogeneity in real wage flexibility and unemployment may be related to differences in the wage bargaining institutions.     

China's economic growth and its real exchange rate

The shocks that underlie China's comparatively rapid growth include gains in productivity, factor accumulation and policy reforms that increase allocative efficiency. The well-known Balassa–Samuelson hypothesis links productivity growth in tradable industries with real appreciations. Yet it relies heavily on the law of one price applying for tradable goods, against which there is now considerable evidence. In its absence, other growth shocks also affect the real exchange rate by influencing relative supply or demand for home product varieties. This paper investigates the pre-conditions for the Balassa–Samuelson hypothesis to predict a real appreciation in the Chinese case. It then quantifies the links between all growth shocks and the Chinese real exchange rate using a dynamic model of the global economy with open capital accounts and full demographic underpinnings to labor supply. The results suggest that financial capital inflows most affect the real exchange rate in the short term, while differential productivity is strong in the medium term. Contrary to expectation, in the long term demographic forces prove to be weak relative to changes in the skill composition of the labor force, which enhances services sector performance and depreciates the real exchange rate.     

Productivity,real exchange rate,and aggregate demand: An empirical exercise applied to Brazil from 1960 to 2011

This research analyzes, from a post Kaleckian perspective, the interactions among the aggregate demand, the real exchange rate, productivity, and real wages in the Brazilian economy from 1960 to 2011. It adopts the longstanding perspective that demand is the driver of capital accumulation and economic growth. The research comprises the following steps: (a) a critical assessment of the growth regime literature, with a particular emphasis on issues related to productivity and the real exchange rate; (b) understanding the relationship between the real exchange rate and the productivity and growth regimes; (c) proposing a theoretical model that relates the real exchange rate, productivity, and the growth regime; and (d) an empirical test of the interaction between the real exchange rate, productivity, and the growth regime. Theoretically the study develops a model showing the interactions between the aggregate demand, the real exchange rate, productivity, and real wages. Furthermore, this research attempts to address the lack of theoretical and empirical studies about the relationship between the aggregate demand, the real exchange rate, productivity and real wages.     

无就业增长与非均衡劳工市场动态学

本文直接模拟了劳工市场的非均衡过程、工资动态轨迹、经济人的最优行为和适应性优化行为。劳动供给源于家庭的效用最大化 ,劳动需求源于企业的利润最大化。企业的适应性优化行为和若干制度因素构成了工资刚性的基本要素 ,劳工市场的供求力量也是影响工资变动的重要因素。根据劳动生产率的变化对工资进行适应性的调节是现实世界企业工资决策的普遍实践。工资刚性与高劳动生产率并存是造成无就业增长的真正原因     

The challenge to china’s enterprises from increasing labor costs: the product quality perspective

ABSTRACT

Using China Employer–Employee Survey data, this paper investigates the possible heterogeneous results of increasing labor costs of different firms. The paper finds that, unskilled labors have a higher wage growth rate than the skilled labor. Firms with higher product quality employ more skilled labor, and thus are less affected by the increasing labor costs. On the other hand, firms with higher product quality have less elastic demand, which makes it possible for them to increase their prices without demand decreasing. The conclusions are well supported by the data. Therefore, we should treat the challenge of increasing labor cost in a new way. The real challenge of increasing labor cost is greater for low-quality firms. The empirical results suggest that some of the low-quality firms should upgrade their quality to a higher level to offset their labor cost increase.

Abbreviations: CEES: China Employer-Employee Survey LP: Labor productivity LTP: Lewis turing point TFP: Total factor productivity     

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.     

Wage restraint and monetary union

Existing work on wage bargaining predicts more aggressive wage setting under monetary union. This is exemplified by Cukierman and Lippi (2001) who postulate that wages are set having area-wide prices in mind. The insight of aggressive wage behaviour has not been confirmed by the EMU experience, which has been characterised by wage moderation. The present paper investigates the possibility of wage restraint using a monetary union model which, realistically, assumes that trade unions set wages with national prices in mind. Drawing on plausible ranges for all parameter values (and macroeconomic shocks), our simulations show that a monetary union elicits real wages that are broadly comparable to those obtained under monetary autonomy. The confidence bounds around these results are rather wide, in particular including scenarios of wage restraint.     

Tradable and nontradable directed technical change

ABSTRACT

We wish to reconcile the major trends in wages and the terms of trade using a directed technical change approach in which: (i) tradable and nontradable goods can be substitutes or complements; and (ii) scale effects can be present or can be partially or totally removed. With a lower skilled labour ratio and a higher relative wage in the tradable sector, the price (real exchange rate or terms of trade) mechanism is crucial in determining sectoral productivity differences and thus wage inequality. Along the balanced growth path, the real exchange rate can be negatively related with the relative productivities in horizontal innovation (the Balassa-Samuelson effect) and with the relative labour level, depending on scale effects. The wage premium increases due to an increase in the relative labour level in the nontradable sector under substitutability with scale effects or under complementarity without scale effects. A calibrated version of the model indicates that the model closely replicates the data for Germany. Moreover, while the Balassa-Samuelson effect is quantified, an increase in the relative supply of labour in the tradable sector decreases both terms of trade and inequality.     

Wages and productivity growth in a competitive industry

We describe the evolution of productivity growth in a competitive industry with free entry and exit. The exogenous wage rate determines the firms’ engagement in labor productivity enhancing process innovation. There is a unique steady state of the industry dynamics, which is globally asymptotically stable. In the steady state, the number of active firms, their unit labor cost and supply depend on the growth rate but not on the level of the wage rate. In addition to providing comparative statics of the steady state, the paper characterizes the industry's adjustment path.     

The effect of labor market monopsony on economic growth

In this endogenous growth model, a minimum efficient scale of production and workers’ home-to-work travel costs combine to give firms monopsony power, and this monopsony power leads to slower growth. Monopsony drives the wage below the marginal product of labor. This lower wage leads to lower investment in human capital and thereby to a lower growth rate. This makes investment in human capital – and therefore the growth rate – suboptimal. We provide evidence from a cross-country panel to support our model: Urbanization, which we assume is determined by a country’s exogenous population density and cropland area, positively impacts the wage share of output; the wage share positively impacts educational attainment; higher-income countries have higher wage shares; and within-country upticks in the wage share have a positive lagged effect on the growth rate.     

Union growth in The Netherlands 1961–1989

An empirical analysis is presented of union growth in The Netherlands over the past decades. The analysis shows that the effect of changes in the industrial structure is very small. It appears that union growth is influenced by wage growth and by unemployment. If real wages increase more than labour productivity or if unemployment declines union membership increases.     

Countercyclical or procyclical real wages? A disaggregate explanation of aggregate asymmetry

The time-series analysis of disaggregated data for a sample of 28 private industries verifies the prevalence and sources of asymmetry in aggregate data. The evidence indicates that asymmetry in the cyclical behavior of the real wage is widespread across the U.S. economy. The reduction in the real wage during recessions appears pronouncedly larger compared to the increase in the real wage during expansions in many industries. Across industries, price inflation increases faster compared to nominal wage inflation in the face of higher demand variability. Price flexibility moderates the increase in the real wage and output growth during expansions. In contrast, prices appear more downwardly rigid compared to the nominal wage in the face of demand variability. Price rigidity exacerbates the reduction in the real wage and output contraction during recessions. The combined evidence supports the implications of the sticky-price explanation of business cycles.First version received: June 2003/Final version received: June 2004The author thanks an anonymous referee for helpful comments on an earlier draft of the paper. The views expressed in this paper are those of the author and should not be interpreted as those of the International Monetary Fund.     

Stagnation or transformation of a dual economy through endogenous productivity growth

A growth model is developed for an open dual economy. The economyexpands owing to a higher growth rate of labour productivityin the modern sector through the Kaldor–Verdoorn channeland higher effective demand through a Keynesian channel. Themodel incorporates a retardation mechanism affecting the slopesof productivity and output growth schedules as labour surplusand economies of scale diminish. A wage-led or profit-led regimeand initial conditions may give rise to: de-industrializationin terms of both output and employment; a growth trap sustaininga situation of structural heterogeneity; or sustainable employmentand adequate output and productivity growth.     

Combining minimum wage and exchange rate policy to release the external constraint on growth

In this article we analyse the combination of a minimum wage and a devaluation/depreciation so as to release the external constraint on growth. The policy maker aims at achieving both balanced trade and higher growth. These may be reached by devaluating the domestic currency, which however supports traditional industries characterized by high price elasticity and low income elasticity of demand. The release of the external constraint in the short term then yields a stronger constraint in the longer term. If traditional industries are unskilled and labour‐intensive, the setting of a minimum wage distorts the specialization towards sectors with high demand growth. Devaluation/depreciation and minimum wage may thus be combined to release both the short term and longer term external constraint. We determine the condition for such a policy to be efficient. This combined policy must come with an educational policy that supports skill upgrading. It is typically tailored to ‘advanced emerging countries’ which aim at changing their specialization without slowing their growth.