Downward wage rigidity and job mobility

Using data from the German Socio-Economic Panel (GSOEP) we study whether being individually affected by downward wage rigidity has an effect on layoffs, quits and intra-firm mobility. Within a structural empirical model we estimate the individual extent of wage rigidity. This is expressed by the wage sweep-up, which measures by how much individual wage growth increases through the effect of downward wage rigidity when compared to a counterfactual labour market with flexible wage setting. We find robust negative effects of wage sweep-up on quits and layoffs and some evidence for a positive association of wage sweep-up and promotion opportunities. This is consistent with a core-periphery view of the labour force, where a core work force is protected from layoffs and wage cuts and at the same time enjoys good promotion opportunities. On the other side a peripheral work force provides a buffer for adjustment and suffers from both flexible wages, more insecure jobs and less internal promotion opportunities.      

Government incentive strategies and private capital participation in China’s Shale gas development

Shale gas development investments are uncertain and irreversible in the initial stage in China. Flexible incentive strategy is needed for governments to guide private capital participation at different development stages. This study aims to provide analysis governments can use to encourage private investment in shale gas projects according to its plans in an extended real options framework. A social benefits variable is introduced to determine the threshold of social benefits that determine whether the government will choose a deferred or instant incentives strategy. By considering the efficiency factor, we show the optimal arrangements of two kinds of incentives: tax cuts and production subsidies, to implement incentive targets. The results indicate that current market demand and social benefits are the key factors that affect the government’s choice of incentive strategy. We also find that the optimal level of incentives, either tax cuts or production subsidies, are independent of current market demand and future market uncertainty under the delayed incentive strategy, but which affect the optimal level of incentives under the instant motivation strategy, and ignoring the negative influence of unpredictable random events on future market demand might lead to insufficient government incentives in this case.     

Firm heterogeneity and trade-induced layoffs: An empirical investigation

We use a novel data set with verified observations of trade-induced layoffs by U.S. firms to study the interaction between firm productivity and trade liberalization as key determinants of firm-level job destruction due to trade. We find that patterns of trade-induced layoffs are broadly consistent with the predictions for firm-level employment generated by the Melitz (2003) heterogeneous firms theory – the number of trade-induced layoffs increases with firm productivity for non-exporting firms but decreases with firm productivity for exporting firms. The fact that exporting firms incur trade-induced layoffs at all invites a refined interpretation of the theory. Our findings suggest that exporting firms may lay off some workers who work in production for their shrinking domestic segments, while also engaging in some within-firm reallocation of workers. We also find that, even after controlling for productivity and export status, larger firms lay off more workers due to trade competition.     

Technical change and market structure

This paper investigates the ceteris-paribus effects of labor reducing technical progress on industry-wide employment under different market regimes. We distinguish between a contestable market, a monopoly, and a market with bounded supplier power. Under a constant wage rate, employment will not decrease only if the elasticity of demand on a contestable market exceeds one. The same thing holds for markets with bounded supplier power. Under a monopoly, price elasticity must even be more than three. Ceteris paribus we thus have to expect a higher probability of employment reduction under a monopoly than under other market regimes. Raising wages proportional to productivity leads to an employment reduction on stagnating markets with supplier power. Here a raise in wages without layoffs is only possible if the growth in demand is at least as high as the growth in productivity.The author is indebted to Alfred E. Ott, Sabine Böckem, Rolf Wiegert and Ulf Schiller for valuable comments. Of course, I take responsibility for all remaining errors.     

Does Equal Pay Legislation Reduce Labour Market Inequality?

This paper considers a labour market model of monopsonistic competition with taste-based discrimination against minority workers to study the effect of equal pay legislation on labour market inequality. When the taste for discrimination is small or competition is weak, the policy removes job segregation and the wage gap completely. However, with a bigger taste for discrimination or stronger competition, equal pay legislation leads to more job segregation, and sometimes minority workers end up earning less than before. Profits of discriminating firms might increase, and discrimination can persist in the long run, although it would have disappeared without the policy.     

Government efficiency,institutions, and the effects of fiscal consolidation on public debt

We study the evolution of the ratio of public debt to GDP during 132 fiscal episodes in 21 OECD countries in 1981–2008. Our main focus is on debt dynamics during 40 consolidation periods. To define these periods we use data on the evolution of the underlying cyclically adjusted primary balance, and as such avoid biases that may be induced by one-off budgetary measures. The paper brings new evidence on the role of public sector efficiency for the success of fiscal consolidation. First, we confirm that consolidation programs imply a stronger reduction of the public debt ratio when they rely mainly on spending cuts, except public investment. Government wage bill cuts, however, only contribute to lower public debt ratios when public sector efficiency is low. Second, we find that a given consolidation program will be more effective in bringing down debt when it is adopted by a more efficient government apparatus. Third, more efficient governments adopt consolidation programs of better composition. As to other institutions, consolidation policies are more successful when they are accompanied by product market deregulation, and when they are adopted by left-wing governments. By contrast, simultaneous labor market deregulation may be counterproductive during consolidation periods.     

An explorative empirical analysis of the influence of labour flows on wage formation

This study presents an explorative econometric analysis of the influence of labour market flows on wage formation. It applies the vector cointegration and common trends methodology of Johansen (Likelihood-based Inference in Cointegrated Vector Autoregresssive Models, OUP, Oxford, 1995). According to this approach, a combination of the flow of layoffs (flow from employment to unemployment) and the flow of filled vacancies (successful matches) appears to be an adequate alternative to the unemployment rate as indicator of labour market tightness in the wage equation for The Netherlands.     

INCENTIVES AND THE COST OF FIRING IN AN EQUILIBRIUM LABOR MARKET MODEL WITH ENDOGENOUS LAYOFFS*

I study the effects of firing costs in an equilibrium model of the labor market with moral hazard. Layoff is an incentive device, modeled as termination of the optimal long‐term contract. When the economy’s stock of firms is fixed, firing costs could reduce layoffs and increase worker welfare. In the long run when firms are free to enter and exit the market, firing costs generate not only lower employment, longer unemployment durations, and lower aggregate output, but also lower welfare for both employed workers and new labor market entrants.     

西部地区禀赋比较优势与制成品产业结构优化

在中国入世和西部开发的背景下,西部地区面临着全面开放和要素禀赋结构不断变化的环境。西部原先的产业结构及计划经济体制下的隐性失业逐渐暴露,并且缺乏经济发展及结构优化所必须的资金。这要求地方政府的相关政策要有很强的务实性。西部地区的制成品产业结构优化应建立在当地客观的要素禀赋结构基础之上,动态比较优势的实现要依赖于禀赋结构的有效升级。因此,民间资金与外资的积极参与在很大程度上有赖于西部市场化进程的加快和禀赋比较优势的充分体现。     

Golden cages for showy birds: Optimal switching costs in labor contracts

Under what circumstances do workers sign contracts with high quitting penalties? Our answer points to market transparency. When the worker's performance is privately observed by the incumbent firm, alternative employers face an adverse selection problem. As a result, efficient separations can only take place through involuntary layoffs and there is no role for quitting fees. In contrast, when performance is public, quitting fees are useful devices to appropriate the surplus from workers’ reallocation. Separations are amicable and take the form of quitting after downwardly renegotiating the fees. Qualitative features of contracts are independent of the distribution of ex-post bargaining power. The impact of switching costs on total welfare and its distribution depends on the degree of market transparency and the ex-ante distribution of market power.     

Exports, unemployment, and the welfare state

Abstract .  The paper analyzes the labour market effects of globalization when foreign market entry is costly and risky. With flexible labour markets, a fall in foreign market entry cost tends to generate more income inequality, but not necessarily so, as more firms pay foreign entry cost. By contrast, when labour markets are inflexible in the short run, globalization tends to increase unemployment. In this situation, government unemployment benefits reduce the wages that exporting firms need to pay workers as risk compensation. Thus more firms within an industry and more industries enter the foreign market, which in turn tends to increase unemployment.     

Termination of dynamic contracts in an equilibrium labor market model

In an equilibrium model of the labor market, workers and firms enter into dynamic contracts that can potentially last forever, but are subject to optimal terminations. Upon termination, the firm hires a new worker, and the worker who is terminated receives a termination contract from the firm and is then free to go back to the labor market to seek new employment opportunities and enter into new dynamic contracts. The model permits only two types of equilibrium terminations that resemble, respectively, the two kinds of labor market separations that are typically observed in practice: involuntary layoffs and voluntary retirements. The model allows for the simultaneous determination of a large set of important labor market variables including equilibrium unemployment and labor force participation. An algorithm is formulated for computing the model's equilibria. I then simulate the model to show quantitatively that the model is consistent with a set of important stylized facts of the labor market.     

Bank privatization in Argentina: A model of political constraints and differential outcomes

Although case studies suggest that political constraints affect bank privatization transactions, these constraints have been neither theoretically modeled nor econometrically tested. This paper presents a simple model of the tradeoffs governments and buyers face during these transactions. In addition to price, the buyer is concerned about solvency and profitability following privatization. Similarly, politicians are concerned about layoffs and service coverage. We apply the framework to provincial bank privatizations in Argentina, finding that provinces with fiscal problems were willing to accept more layoffs and guarantee more of the privatized bank's portfolio in return for a higher price.     

Heterogeneous labor and implicit contracts

The paper examines the role of layoffs under implicit contracts, when labor is heterogeneous. Wage-adjustment strategies are preferable in that employment is allocated more efficiently. The impossibility of effectively commiting to employment levels may reverse the ordering.     

Public investment and budgetary consolidation in Portugal

In this paper we find that public investment in durable goods has a positive effect on long-term economic performance in Portugal. We also find that these positive effects are not strong enough for public investment to pay for itself in the form of future tax revenues. Therefore, cuts in public investment in durable goods, although costly in terms of long-term economic performance seem to be an effective way of alleviating pressure on the public budget. It is important to note, however, that this general result contrasts sharply with the evidence found in this paper for public investment in equipment, a small component of public investment in durable goods, as well as with evidence elsewhere for public investment in transportation infrastructures. For these, the effects on output are strong enough for public investment to pay for itself. Therefore, cuts in these two types of public investment, would have negative long-term economic effects as well as negative long-term budgetary effects. Clearly, not all public investment is created equal. We would like to thank the editor as well as two anonymous referees for unusually useful comments and suggestions. The usual disclaimers apply.     

Motivated sellers and predation in the housing market

We develop an equilibrium search model of the housing market where sellers may become distressed as they are unable to sell. A unique steady state equilibrium exists where distressed sellers attempt liquidation sales by accepting prices that are substantially below fundamental values. During periods where a large number of sellers are forced to liquidate customers exhibit ‘predation’: they hold off purchasing and strategically slow down the speed of trade, which in turn causes more sellers to become distressed. The model naturally suggests several proxies of liquidity. Interestingly, the average time on the market (TOM), one of the most frequently used statistics in the literature, does a poor job within the context of liquidation sales and predation. Specifically we show that TOM falls during periods of predatory buying, which, if interpreted on face value, indicates that the market becomes more liquid with predation. We propose an alternative proxy – the profit loss in fire sales – which appears to be a more robust measure of liquidity than TOM.     

The Phasing of Fiscal Adjustments: What Works in Emerging Market Economies?

This paper investigates the political and economic determinants of successful fiscal adjustment in 25 emerging market economies from 1980 to 2001. The results show that large and back‐loaded fiscal adjustments have the highest likelihood of success. Fiscal consolidations based on expenditure cuts increase the probability of approaching and achieving fiscal sustainability but are insufficient to maintain it unless accompanied by revenue reforms. Adjustment episodes launched in countries where governments enjoy a parliamentary majority and do not face imminent elections, are found to be more successful. Fiscal consolidations undertaken under IMF‐supported programs also have a higher probability of success.     

Plant-level employment development before collective displacements: comparing mass layoffs,plant closures and bankruptcies

This article analyzes the development of employment levels and worker flows before bankruptcies, plant closure without bankruptcies and mass layoffs. Utilizing administrative plant-level data for Germany, we find no systematic employment reductions prior to mass layoffs, a strong and long-lasting reduction prior to closures, and a much shorter shadow of death preceding bankruptcies. Employment reductions in closing plants, in contrast to bankruptcies and mass layoffs, do not come along with increased worker flows. These patterns point to an intended and controlled shrinking strategy for closures without bankruptcy and to an unintended collapse for bankruptcies and mass layoffs.     

Managerial pay adjustments: Decomposition and impact on firm productive efficiency

This paper decomposes managerial pay adjustments and examines their impact on firm productivity based upon Taiwanese firm panel data. Pay adjustments are decomposed into components arising from three sources: a scheme based on the external labour market comparisons, a scheme derived from the changes in firm and manager characteristics, and transitory pay adjustments. The stochastic frontier model is used to test how these pay components affect firm productivity. Empirical results suggest that the pay adjustments based on the comparison between managers' actual pay and their market-clearing pay are positively related to the output and technical efficiency of the firms, whereas this productivity-boosting effect cannot be seen for other components. This paper shows the importance of the external labour market in connecting managerial pay to firm productivity, and provides a model for the research of managerial pay in an environment where the compensation structure does not have apparent stock incentives.