Unobserved Heterogeneity,Exit Rates,and Re‐Employment Wages

Exit rates from unemployment and re‐employment wages decline over a period of unemployment, after controlling for worker observable characteristics. We study the role of unobserved heterogeneity in an economy with asymmetric information and directed search. We show that the unique equilibrium is separating and that skilled workers have more job opportunities and higher wages. The composition of the unemployed varies with the duration of unemployment, so average exit rates and wages fall with time. The separating equilibrium relies on performance‐related pay schemes and the ability of firms to commit to renting an input that is complementary to worker skills.     

Effort, trade, and unemployment

Abstract.  This paper incorporates equilibrium unemployment caused by efficiency wages into a monopolistic competition model of trade. Worker effort is treated as an endogenous variable that depends on the optimizing behaviour of firms and workers. Opening up trade induces firms to demand greater worker effort and to cut the size of their workforce. This counteracts the positive employment effect due to entry of firms. Circumstances are indicated in which the two effects just balance, leaving aggregate employment unchanged. Trade unambiguously increases worker effort, thereby enhancing within-firm productivity.     

Optimal unemployment insurance and redistribution

We characterize optimal income taxation and unemployment insurance in a search‐matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals decide whether to participate as job seekers and if so, how much search effort to exert. Unemployment insurance trades off insurance versus search and participation incentives. We also allow for different productivity types so there is a redistributive role for the income tax and show that a piecewise linear wage tax internalizes the macro effects arising from endogenous wages. Type‐specific lump‐sum taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive‐margin optimal redistribution framework where transfers to the involuntarily and voluntarily unemployed can differ, and nests several standard models in the literature.     

Endogenous employment rate in the efficiency wage shirking approach

The aim of New Keynesian theorists is to obtain Keynesian results on the basis of maximizing behavior. Accordingly, the New Keynesian shirking models depict a world of fully rational maximizing agents where equilibrium unemployment is the main consequence of the payment of efficiency wages. The problem is that oversimplified nature of most shirking models has until now prevented a full investigation of the interdependence of unemployment, the effort supplied by workers and labor demand. This article shows that the existence of this interdependence weakens the whole approach. In particular, when the unemployment rate is considered a truly endogenous variable, the stability of the macroeconomic equilibrium is generally incompatible with the existence of unemployment ascribed to the fact that firms pay efficiency wages.     

FROM ONE TO MANY ISLANDS: THE EMERGENCE OF SEARCH AND MATCHING MODELS

The notion of frictional unemployment failed to grow into a full‐fledged theory in the writings of Beveridge, Pigou and Hicks, as these economists were unwilling and/or unable to go beyond the then‐prevailing Marshallian approach. Here, first we make explicit the trade organization assumptions underpinning Marshall's equilibrium theory. Next we examine Beveridge's, Pigou's and Hicks' early works on wages and unemployment. Finally, we look at the seminal papers that paved the way for search literature: McCall, Lucas and Prescott, Mortensen and Pissarides. We show that they succeed in providing an unemployment result, because they indeed depart from the Marshallian trade organization.     

UNEMPLOYMENT POLICIES IN AN ECONOMY WITH ADVERSE SELECTION

This paper studies the effects of unemployment policies in a simple static general equilibrium model with adverse selection in the labour market. Firms offer a contract that induces the self‐selection of workers. In equilibrium, all unskilled workers are screened out and some skilled workers are rationed out. It is shown that the provision of unemployment insurance raises involuntary unemployment by encouraging adverse selection, while unemployment assistance – or subsidy to unemployment – reduces involuntary unemployment. A simple efficiency wage model is also presented to show that either of the two policies reduces employment by taxing effort and subsidizing shirking. The key is whether the social role of unemployment is a sorting device or a worker discipline device.     

Equilibrium unemployment as a discipline device when finding employment is costly

Abstract In this paper, we study a model that incorporates costly job search into an efficiency wage model. We show that the relationship between wages and detection rates is ambiguous in this framework. The model can generate a positive relationship, consistent with empirically reasonable values for unemployment rates, job finding rates, and employment duration.     

COLLECTIVE BARGAINING,AWARENESS OF GENERAL EQUILIBRIUM EFFECTS,AND UNEMPLOYMENT*

We explore the significance of general equilibrium feedback effects for wage‐bargaining. We examine a two‐sector economy and show that if agents only consider labor demand effects low real wages and low unemployment are the consequences. With an intermediate view, i.e., when partial equilibrium effects within a sector are taken into account, high real wages and unemployment result. If all general equilibrium effects are perceived simultaneously, we once again obtain a situation with low wages and unemployment. The results may explain why unemployment is high in some European countries.     

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.     

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.     

Monopoly,economic efficiency and unemployment

The objective of this paper is to analyze the efficiency consequences of monopoly from the perspective of an efficiency-wage model of unemployment based on Shapiro and Stiglitz (1984). An important feature of our model is that a firm can raise the probability that a shirking worker is detected by increasing its effort or investment in the monitoring of workers. Using this model we study how a monopolist's decision with regard to employment, output and monitoring is affected by exogenous variables such as job separation rate, technological advances, market size, and unemployment benefits. Furthermore, by comparing with the competitive equilibrium we find that monopoly is associated with higher unemployment rate, smaller output, and less monitoring. Surprisingly, however, monopoly does not necessarily lead to lower welfare level.     

Social Security and Old Age Unemployment Risk with Efficient Wage Bargaining

I analyze a life‐cycle economy with old age productivity risk where wages, employment, and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms. Allocations with limited union membership are second‐best inefficient as they generate too little labor supply in young age, too much consumption before retirement, too little employment of older workers (early retirement), and too little insurance against old age unemployment. Providing public transfers to early retirees (disability benefits or early pensions) might help to increase the degree of risk sharing at the cost of lower old age employment. Depending on whether absolute risk aversion is increasing or decreasing in consumption, these policies might or might not produce efficiency gains at equilibrium.     

Experience Rating versus Employment Protection Laws in a Model where Firms Monitor Workers*

While layoff costs in the U.S. are mostly due to experience‐rated unemployment insurance, layoff costs in European labour markets are primarily a consequence of employment protection laws. In this paper we compare the effects of experience rating and employment protection laws on employment and welfare in a model where unemployment arises due to efficiency wage setting and where labour turnover is inefficiently high. We show that a revenue‐neutral introduction of experience rating reduces labour turnover and increases employment and welfare. The introduction of employment protection laws may also reduce labour turnover but employment declines.     

A REAPPRAISAL OF THE INCIDENCE OF EMPLOYER CONTRIBUTIONS TO SOCIAL SECURITY IN JAPAN

This paper reappraises Tachibanaki and Yokoyama (2008)—an empirical analysis indicating no apparent backward shifting of employer social insurance contributions—by modifying their empirical strategy. First, we control for a spurious positive correlation between wages and employers' contribution rates by trend variables. Second, we utilize a cross‐sectional variation in the contribution rate of workers' compensation insurance. Third, we exclude two industries from our sample to remove sampling errors in wages. Our results indicate that the social insurance burden shifts back onto employees to some extent, contrary to Tachibanaki and Yokoyama (2008). Our finding is consistent with other existing studies.     

Unemployment and indeterminacy

Using an efficiency-wage model, we examine the relationship between indeterminacy and unemployment insurance. It is shown that the less unemployment insurance is, the more likely equilibrium is to be indeterminate. Equilibrium can be indeterminate even without externalities or increasing returns, which makes a sharp contrast to the recent literature on indeterminacy. Our result is based on the fact that the no-shirking condition with marginal utility of wealth kept constant is downward sloping when income insurance is not perfect.     

Monitoring Job Offer Decisions,Punishments, Exit to Work,and Job Quality

Unemployment insurance systems include the monitoring of unemployed workers and punitive sanctions if job search requirements are violated. We analyze the causal effect of sanctions on the ensuing job quality, notably on wages and occupational level. We use Swedish data and estimate duration models dealing with selection on unobservables. We also develop a theoretical job search model that monitors job offer rejection versus job search effort. The empirical results show that, after a sanction, the wage rate is lower and individuals move more often to a part‐time job and a lower occupational level, incurring human capital losses.     

Worker Absenteeism in Search Equilibrium*

In this paper we introduce a general equilibrium model of search unemployment that incorporates absence from work as a distinct labor force state. Absenteeism is driven by random shocks to the value of leisure that are private information to the workers. Firms maximize profits while recognizing that the compensation package may affect the queue of job applicants and the absence rate. The analysis provides results concerning the effects of social insurance benefits and other determinants of workers' and firms' behavior. The normative analysis identifies externalities associated with firm‐provided sick pay and examines the welfare implications of alternative policies.     

The Choice of Technology and Equilibrium Wage Rigidity

In this general equilibrium model, firms engage in oligopolistic competition and choose increasing returns technologies to maximize profits. Capital and labor are the two factors of production. The existence of efficiency wages leads to unemployment. The model is able to explain some interesting observations of the labor market. First, even though there is neither long-term labor contract nor costs of wage adjustment, wage rigidity is an equilibrium phenomenon: an increase in the exogenous job separation rate, the size of the population, the cost of exerting effort, and the probability that shirking is detected will not change the equilibrium wage rate. Second, the equilibrium wage rate increases with the level of capital stock. Third, a higher level of capital stock does not necessarily reduce the unemployment rate. That is, there is no monotonic relationship between capital accumulation and the unemployment rate.     

Implementing the Mortensen rule in a frictional labor market

We show that, in settings where meetings can be multilateral, the allocation rule proposed by Mortensen (1982) can be relatively straightforward to implement: as a local auction conducted by sellers. The implications of using this mechanism in a simple model of the labor market are then explored. We characterize the equilibrium properties of this model, which include wage dispersion, and examine its implied Beveridge curve. A dynamic version of the model is calibrated to the US labor market, and we show that the model can account for observed vacancy rates, given parameters that are chosen to match the average wages and the natural rate of unemployment, although the implied wage dispersion is quite small. Finally, in the limit, as the time between offer rounds in the model approaches zero, the equilibrium approaches the Walrasian competitive equilibrium.     

The labor market impact of immigration in Western Germany in the 1990s

In this article we estimate the wage and employment effects of recent immigration in Western Germany. Using administrative data for the period 1987-2001 and a labor-market equilibrium model, we find that the substantial immigration of the 1990s had very little adverse effects on native wages and on their employment levels. Instead, it had a sizeable adverse employment effect on previous immigrants as well as a small adverse effect on their wages. These asymmetric results are partly driven by a higher degree of substitution between old and new immigrants in the labor market and in part by the rigidity of wages in less than flexible labor markets. In a simple counter-factual experiment we show that in a world of perfect wage flexibility and no unemployment insurance the wage-bill loss of old immigrants would be much smaller.