Unemployment and product market competition in a Cournot model with efficiency wages

This paper analyzes the impact of product market competition on unemployment, wage and welfare in a model where unemployment is caused by the efficiency wage consideration and oligopolistic firms compete in quantity. It is shown that while more intense competition in the product market increases output and reduces price, it does not necessarily lead to a lower unemployment rate or a higher wage for workers. Depending on the technologies, the relationship between the intensity of competition and the level of employment (respectively, wage, welfare) is not always monotonic, and, in some instances, has an inverted U‐shape.     

Output and wages with inequality averse agents

Abstract.  We analyse a two‐task work environment with risk‐neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract that, owing to his wealth constraint, leads to a rent that the other agent resents. We show that greater inequality aversion unambiguously decreases total output and therefore average labour productivity. More specifically, inequality aversion reduces effort, wage, and payoff of agent 1. Effects on wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function. JEL classification: D2, J3     

Wage inequality and skill supplies in a globalised world

We investigate empirically, and explain theoretically, how the relative wages of skilled and unskilled workers vary with their relative supplies in open economies. Our results combine the insights of simple labour market and trade models. In countries that trade, relative wages respond inversely to variation in skill supplies, but the response decreases with the degree of openness to trade and is small in very open countries. To reconcile our results with standard estimates of the elasticity of substitution between skilled and unskilled workers, we allow also for the influence of directed technical change and income elasticity of demand for skill-intensive goods.     

Privatization and efficiency wages

The impact of privatization is investigated in a shirking model of efficiency wages. Without trade unions, privatization — modeled as a stricter control of employees — lowers wages and raises employment, output, and profits, while effort and productivity effects depend on the employees' risk aversion. However, for a utilitarian monopoly union, facing a company characterized by a constant-elasticity labor-demand schedule, privatization raises efficiency wages. If privatization is modeled as a stronger profit orientation, wages, effort, and labor productivity will rise, while employment will shrink in a wage-setting firm. Again, wage and employment effects can be reversed in the case of wage negotiations.     

Sticky wages,efficiency wages,and market processes

Work on this article was supported by a grant from the Research Committee of the College of Business Administration, University of South Florida.     

Wage inequality, technology, and trade

The recent widening of wage inequality has been attributed by some to skill-biased-technical-change and by others to trade liberalization. This paper examines the two explanations within a unified model and also presents a new modeling of skill-biased-technical-change, where skilled workers replace unskilled ones. As a result technology adoption is endogenous and does not occur in all countries. Hence, wages for both types of workers, trade patterns and also factor productivities in all countries are endogenously determined. The model sheds light on the relationship between technology and trade, on the reasons for global productivity differences and on the causes for the recent rise in wage inequality.     

Nutritional efficiency wages and child labor

This paper formally analyzes the incidence of child labor by employing an overlapping-generations general-equilibrium model of a small open economy. An individual's ability determines whether or not he/she becomes a skilled worker. The supply side of the economy is composed of two sectors: a modern sector that produces a homogeneous good using skilled labor and physical capital; and an agrarian sector that produces a traditional good using unskilled adult labor, child labor, and land. An increase in foreign direct investment and improvements in education reduce the incidence of child labor. Emigration of skilled (unskilled) workers reduces (raises) the supply of child labor, while trade sanctions reduce the demand for child labor. Child wage subsidies have an ambiguous effect on the incidence of child labor while education subsidies are effective in reducing the incidence of child labor. Simulation analysis is used to investigate the welfare effects of the aforementioned policies.     

Wage inequality,segregation by skill and the price of capital in an assignment model

Some pieces of empirical evidence suggest that in the U.S., from the 1970s to the 1990s, (i) wage inequality between-plants rose much more than wage inequality within-plants and (ii) there was an increase in the segregation of workers by skill into separate plants. This paper presents a frictionless assignment model in which these two features can be explained simultaneously as the result of the decline in the relative price of capital. Additional implications of the model regarding the skill premium and the dispersion in labor productivity across plants are also consistent with the empirical evidence. The model permits to consider changes in the skill distribution too. Combining these changes with falling capital prices provides a more comprehensive view of the overall trend of wage inequality and of workers' segregation by skill in the data, and it helps explaining some episodes of decreasing wage inequality.     

Wage differentials, discrimination and efficiency

I analyze a large labor market where homogeneous firms post wages to direct the search of workers who differ in productivity. I show that the model has a unique equilibrium. The wage differential depends positively on the workers’ productivity differential only when the latter is large. When the productivity differential is small, high-productivity workers get a lower wage than low-productivity workers. This reverse wage differential remains even when the productivity differential shrinks to zero. However, the equilibrium is socially efficient. High-productivity workers always get the employment priority and higher expected wages than low-productivity workers. Although discrimination in terms of expected wages does not exist, conventional measures are likely to incorrectly find discrimination in the model.     

Networks in labor markets: Wage and employment dynamics and inequality

We present a model of labor markets that accounts for the social network through which agents hear about jobs. We show that both wages and employment are positively associated (a strong form of correlation) across time and agents. We also analyze the decisions of agents regarding staying in the labor market or dropping out. If there are costs to staying in the labor market, then networks of agents that start with a worse wage status will have higher drop-out rates and there will be a persistent differences in wages between groups according to the starting states of their networks.     

Wage inequality in Turkey, 2002–10

This paper studies the evolution of wage inequality in Turkey using household labour force survey data from 2002 to 2010. Between 2002 and 2004, the relative supply of more‐educated workers to less‐educated workers remained constant while their relative wages decreased in favour of less‐educated workers. However, between 2004 and 2010, the relative supply of more‐educated workers to less‐educated workers rose, while their relative wages remained constant or kept increasing in favour of more‐educated workers. This suggests factors other than those implied by a simple supply‐demand model are involved, such as skill‐biased technical change or minimum wage variations. The decomposition of wage inequality reveals that the price (wage) effect dominates the composition effect particularly in the first period. Our results show that the real minimum wage hike in 2004 corresponds to a major institutional change, which proved to be welfare‐increasing in terms of wage inequality. The upper‐tail (90/50) wage inequality decreased between 2002 and 2004 and stayed constant thereafter, whereas the lower‐tail (50/10) wage inequality decreased throughout the period. Our findings thus provide evidence supporting the institutional argument for explaining wage inequality.     

Intermediate good sourcing,wages and inequality: From theory to evidence

This paper examines the consequences of offshoring and outsourcing on domestic wages and wage inequality. I highlight the role of labor market frictions in impacting firms’ outsourcing and offshoring decisions; specifically, how differential costs of matching with workers affect the location of production (onshore or offshore) and how differential costs of assessing worker quality affect the ownership of intermediate production (intra‐firm or inter‐firm). I demonstrate how firm sourcing decisions can depend crucially on the industry skill intensity, which reflects the importance of worker–firm match quality, and as a result, the effect of offshoring on domestic labor depends on occupation and industry characteristics, as well as the ownership regime of trade. Bringing the theory to the data I rely on plausibly exogenous variation in the cost of inter‐ and intra‐firm offshoring to identify the effects of a change in each type of offshoring on domestic wages. I find strong evidence that the effect of offshoring on domestic wages—both on the average and on the wage distribution—is governed by the type of offshoring (inter‐ vs. intra‐firm), the skill intensity of the industry, and the offshorability of the occupation.     

Endogenous inequality and fluctuations in a two-country model

We study a two-country version of Matsuyama's [K. Matsuyama, Financial market globalization, symmetry-breaking, and endogenous inequality of nations, Econometrica 72 (2004) 853-884] world economy model. As in Matsuyama's model, symmetry-breaking can be observed, and symmetry-breaking generates endogenously determined levels of inequality. In addition, we show that when the countries differ in population size, their interaction through credit markets may lead to persistent endogenous fluctuations.     

Union bargaining power, relative wages, and efficiency in Canada

We use a computable general equilibrium model incorporating trade unions, efficient Nash contracts, existing distortions, and international trade to measure the deadweight loss in Canada arising from the ability of unions to raise wages above competitive levels. The model incorporates two features new to CGE analysis: parameterization of union bargaining power and variations in union preferences. Estimates indicate the deadweight loss to be no more than 0.04 per cent of GNP. However, the small aggregate effect masks considerable adjustments at the industry level, in imports and exports, and in the distribution of income. Adjustments are also larger with employment-oriented unions.
Pouvoir de négociation des syndicats, salaires relatifs et efficacité au Canada. Les auteurs utilisent un modèle d'équilibre général calculable qui prend en compte les syndicats ouvriers, des contrats efficients à la Nash, les distorsions existantes, et le commerce international pour mesurer les pertes de bien-être au Canada attribuables au fait que les syndicats engendrent des niveaux de salaires au dessus des niveaux concurrentiels. Le modèle incorpore deux éléments inédits: la paramétrisation du pouvoir de négociation des syndicats et les variations dans les préférences des syndicats. Les résultats indiquent que les pertes de bien-être ne dépassent pas 0,04 pourcent du PIB. Cependant, ce petit effet agrégé masque des ajustements substantiels au niveau de l'industrie, dans les importations et exportations, et dans la répartition des revenus. Les ajustements sont aussi plus importants quand les syndicats mettent l'accent sur l'emploi.     

Wage inequality in a developing country: decrease in minimum wage or increase in education returns

In this paper we analyze the increase in wage inequality observed in the Uruguayan labour market during the last decade, by studying how the changes in minimum wage and returns to education affected the wage structure. Although in most developed countries a significant proportion of the increase in wage inequality is explained by a fall in the real minimum wage, this is not the case for the Uruguayan labour market. We observe that returns to education increased significantly, which could explain the increase of wage dispersion by its effects on the upper tail of the wage distribution. To derive these conclusions we follow a parametric and nonparametric quantile regression approach.     

Trade and inequality in a directed search model with firm and worker heterogeneity

This paper integrates the insight that exporting firms are typically more productive and employ higher‐skilled workers into a directed search model of the labour market. The model generates a skill premium as well as residual wage inequality among identical workers. A trade liberalization increases the skill premium and likely increases residual inequality among high‐skilled workers. The calibrated model generates results consistent with the prior literature examining the effect of the Canada‐US Free Trade Agreement on the Canadian labour market: a significant decrease in employment in manufacturing, but only a small change in unemployment and wages.     

Fertility,income and welfare in an OLG model with regulated wages

We analyse the effects of the regulation of wages in a standard one-sector OLG model of neoclassical growth extended to account for endogenous fertility decisions of households and unemployment benefit policies financed at balanced budget. In contrast with the prevailing literature, which has failed to pay due attention to inter-temporal contexts, our conclusion is that minimum wages may be introduced not only for equity reasons, that is, to increase the income of low-paid workers, but under suitable conditions—i.e., if production is sufficiently capital oriented and the unemployment benefits are high enough—minimum wage legislation might be considered as a source of increased economic performance despite unemployment, i.e. a regulated-wage economy performs better than a market-wage economy. As a consequence, since higher minimum wages raise per capita income together with increasing unemployment, our results imply that a positive correlation between unemployment and long-run income per-capita may exist. Further, the lifetime welfare of the representative generation may be increased as well. Finally, the wage rate may also be treated as a policy instrument for the control of population growth.

Fair wages in a New Keynesian model of the business cycle

We build a New Keynesian model of the business cycle with sticky prices and real wage rigidities motivated by efficiency wages of the gift exchange variety. Compared to a standard sticky price model, our Fair Wage model provides an explanation for structural unemployment and generates more plausible labor market dynamics—notably accounting for the low correlation between wages and employment. The fair wage induced real wage rigidity also significantly reduces the elasticity of marginal cost with respect to output. The smoother dynamics of real marginal cost increase both amplification and persistence of output responses to monetary shocks, thus remedying the well-known lack of internal propagation of standard sticky price models. We take these improvements as a strong endorsement of the addition of real wage rigidities to nominal price rigidities and conclude that the fair wage extension of this paper constitutes a promising platform for an enriched New Keynesian synthesis.     

Wage setting actors and sticky wages: Implications for the business cycle and optimal monetary policy

Two sticky-wage models are introduced in this paper to examine the implications of having either households or firms as wage setting actors. The rate of wage inflation depends positively on the output gap if households set wages whereas such a relationship is of negative sign when firms set wages. Moreover, impulse–response functions and the statistical comparison with US data show different business cycle properties depending upon wage setting actors. Finally, optimal monetary policy is derived for each case, and compared with a Taylor-type monetary policy rule.