Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity

We introduce search unemployment into Melitz's trade model. Firms' monopoly power on product markets leads to strategic wage bargaining. Solving for the symmetric equilibrium we show that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves average productivity. We show that this condition is likely to be met by a reduction in variable trade costs or by entry of new trading countries. Calibrating the model shows that the long-run impact of trade openness on the rate of unemployment is negative and quantitatively significant.     

Long-term unemployment,heterogeneity, and state dependence

Zusammenfassung In dieser Arbeit wird zur Erklärung individueller Wiederbeschäftigungschancen von Arbeitslosen mittels Individualdaten für österreich ein Abgangsratenmodell geschätzt, wobei unter Berücksichtigung von unbeobachteter Populationsheterogenität auf verschiedene Formen von state dependence getestet wird. Die Abgangsrate in Beschäftigung steigt mit zunehmender Arbeitslosigkeitsdauer an und hängt primär von bestimmten persönlichen Charakteristika der Arbeitslosen und der Zahl der erhaltenen Arbeitsangebote ab. Die individuellen (Wieder-)Beschäftigungschancen von Personen, die neu oder wieder in das Erwerbsleben eintreten, sind relativ gering und werden außerdem durch vergangene langfristige Arbeitslosigkeit stark reduziert.

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I thank my collegues G. Flaig and G. Licht, G. Arminger, University of Wuppertal, A. Hamerle, University of Konstanz, R. Winter-Ebmer, University of Linz, and the referees for helpful comments. Support from the Austrian Fonds zur Förderung der wissenschaftlichen Forschung is gratefully acknowleged. Of course, the usual caveats apply.     

Recurrent unemployment,welfare benefits and heterogeneity

The objective of this paper is to investigate the causes of the recurrences of individuals in unemployment during benefit periods. So as to attain this objective, we use administrative data from the Spanish Employment Agency to estimate a duration model with multiple spells that allows for unemployment state dependence through lagged unemployment duration in order to distinguish the heterogeneity and scarring effects. We find that an increase in the duration of previous unemployment benefit periods lengthens the expected duration of future unemployment benefit periods. True state dependence and heterogeneity, intensity of job search and local labour market conditions are among the elements that explain this unemployment state dependence.     

A bargaining theory of the firm

Suppose that a firm has several owners and that the future is uncertain in the sense that one out of many different states of nature will realize tomorrow. An owner’s time preference and risk attitude will determine the importance he places on payoffs in the different states. It is a well-known problem in the literature that under incomplete asset markets, a conflict about the firm’s objective function tends to arise among its owners. In this paper, we take a new approach to this problem, which is based on non-cooperative bargaining. The owners of the firm play a bargaining game in order to choose the firm’s production plan and a scheme of transfers which are payable before the uncertainty about the future state of nature is resolved. We analyze the resulting firm decision in the limit of subgame-perfect equilibria in stationary strategies. Given the distribution of bargaining power, we obtain a unique prediction for a production plan and a transfer scheme. When markets are complete, the production plan chosen corresponds to the profit-maximizing production plan as in the Arrow–Debreu model. Contrary to that model, owners typically do use transfers to redistribute profits. When markets are incomplete, the production plan chosen is almost always different from the one in a transfer-free Drèze (pseudo-)equilibrium and again owners use transfers to redistribute profits. Nevertheless, our results do support the Drèze criterion as the appropriate objective function of the firm.     

Corporate profit tax,firm entry with unemployment,and income inequality

In this paper, we provide a general equilibrium analysis of corporate profit tax on income distribution, unemployment, and wage inequality. With firm dynamics in industrial sector, we identify a new channel through which profit tax affects income and wage inequality: profit tax cut will widen not only the wage gap between skilled and unskilled labor, but also exacerbate the wage inequality of unskilled labor among different sectors. The welfare effect of profit tax cut depends on unemployment deepening (labor-distortion effect) and more manufacturing firms enter the market (business-creation effect), eroding the market share of incumbent firms (business-stealing effect).     

Collective bargaining and school district test scores: evidence from Ohio bargaining agreements

We revisit the relationship between collective bargaining by teachers unions and school performance. The empirical literature in this area has found mixed results at both the state and district levels. We contribute to this literature in two ways. First, rather than simply dummy union status, we proxy for the restrictiveness of collective bargaining agreements with the number of pages per agreement. Second, we employ Bayesian spatial methods to deal with spatial dependence in school district activities. Our reduced-form results indicate that collective bargaining directly lowers scores on high school math scores, but that the total effect is zero.     

Foreign direct investment,international trade,and firm heterogeneity

We present an asymmetric model with firm heterogeneity and foreign direct investment (FDI) from a developed country to a developing country. We found that the successful entry firms could be sorted from highest to lowest according to productivity as reimport firms, FDI firms, export firms, and domestic firms. We also found that FDI decreases (increases) the gross national income of the developed (developing) country, but it can either increase or decrease the world income according to the level of the relative propensity to spend. In addition, we demonstrated that FDI influences welfare through variations in average price, national income, and the number of types of goods.     

Union–firm bargaining: Order of play and efficiency

This paper shows that a modified alternating offers Rubinstein model can provide a Pareto superior outcome in the context of the right-to-manage union–firm bargaining. Two examples of bargaining protocols that yield a superior outcome are provided. In the first example, the parties engage in a game in which the order of play is determined as part of the bargaining. We show that the game has a unique subgame perfect equilibrium in which the firm always moves first in the wage bargaining game. The equilibrium wage is, therefore, unique. In the second example, we examine a two-part-tariff alternating offers bargaining protocol, where the parties bargain over the wage and transfer payments. We show that this bargaining protocol has a Pareto efficient, unique subgame perfect equilibrium. Thus, although the parties do not bargain over the level of employment, the outcome under this protocol is, nevertheless, socially optimal.     

Internal bargaining and strategic innovation in the theory of the firm

The transaction cost analysis of the firm has identified asset idiosyncrasy and the risk of ex post opportunism as key determinants of organizational form. Simultaneously, several writers have modeled the distribution of quasi-rents among input suppliers as a bargaining game. These complementary ideas are used to formalize the notion of strategic innovation, where capital and labor attempt to redistribute firm income after specialized assets are in place, through unilateral modifications in production technology. Because strategic behavior can enlarge the quasi-rent component of fifirm income, this process may persist in equilibrium. Asset idiosyncrasy therefore creates room for an autonomous theory of organizational dynamics, partially insulated from events at the market level of analysis.     

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.     

Risk sharing and export performance with firm heterogeneity

We investigate how market uncertainty affects the export performance of a firm through financial frictions. We first extend Melitz's (2003) heterogeneous firm trade model by incorporating demand shocks, linking the demand uncertainties to the financing costs of firms. In this extension, the default probability is endogenously determined by a firm's productivity and demand uncertainty. Hence, firms with higher productivity or lower market uncertainty are offered lower interest rates and thus show better export performance. As an application, we also show that a risk-sharing mechanism, that pools default risk for a certain group of firms, lowers the default risk. This mechanism allows banks to charge lower interest rates to the member firms and therefore ultimately improves their export performance in both extensive and intensive margins. We find a real-world example of such a mechanism from business groups in Korea. Using Korean firm-level data, we show that the more diversified the business group, the greater the likelihood that its member firms export and the bigger their export revenues. We also show that our results are robust to alternative explanations for Korean business groups’ export competitiveness.     

Product quality and firm heterogeneity in international trade

This paper quantifies the separate contributions of product quality and technical efficiency in explaining variation in export outcomes across US manufacturing plants. Unlike previous studies that rely on unit values, I estimate idiosyncratic demand from price and quantity information. I find substantial across‐plant heterogeneity in demand, and consistent with the quality interpretation, demand is positively correlated with advertising expenditures, wage rates and material costs. I use this variation to explain across‐plant heterogeneity in export outcomes. The results show that, in addition to productivity, idiosyncratic demand is an important determinant of selection into exporting and the levels of foreign sales.     

Marx Inside the Circuit: Discipline device,wage bargaining and unemployment in a sequential monetary economy

The aim of this paper is to show that Marxian labour theory of value can be consistently interpreted in terms of the monetary circuit model, where firms need initial finance to start production and where the money supply is endogenous. In contrast to the recently revived Marxian monetary models, in particular the New Interpretation, it is argued here that although the money wage is bargained for on the labour market, the real wage is determined by firms' choices, since firms autonomously determine the structure of production and hence real consumption for the working class as a whole. This does not mean that firms are able to set the real wage without economic and social constraints. Starting from our circuitist reading of the labour theory of value and distribution, a model is developed in order to determine the level of employment and income distribution, on the assumptions that (i) the industrial reserve army affects wage bargaining and labour effort and that (ii) workers react to the failure of their expectations on the real wage by reducing their work intensity. In this context, it is shown that firms may increase their share of profits over time only be means of innovations.     

Efficiency in large markets with firm heterogeneity

Empirical work has drawn attention to the high degree of productivity differences within industries, and its role in resource allocation. In a benchmark monopolistically competitive economy, productivity differences introduce two new margins for allocational inefficiency. When markups vary across firms, laissez faire markets do not select the right distribution of firms and the market-determined quantities are inefficient. We show that these considerations determine when increased competition from market expansion takes the economy closer to the socially efficient allocation of resources. As market size grow large, differences in market power across firms converge and the market allocation approaches the efficient allocation of an economy with constant markups.     

Export market participation with sunk costs and firm heterogeneity

In this article we investigate the importance of sunk costs, firm characteristics and spillovers from nearby exporters on a firm's decision to participate in exporting. The empirical analysis involves the estimation of a nonstructural, discrete choice, dynamic model with firm heterogeneity. By using panel data for Estonian companies from 1994 to 1999 we find that: (i) both sunk costs and observable firm characteristics are important determinants of export market participation; (ii) previous history matters, in that, if a firm has been exporting the previous period or the period before, it significantly increases the likelihood of the firm exporting in the current period; (iii) larger firms with high capital intensity and foreign ownership are more likely to be exporters; (iv) operating in an export-oriented industry increases a firm's likelihood of exporting.     

Collective bargaining and regional wage differences in Spain: an empirical analysis

This article analyses the importance of labour market institutions and, in particular, collective wage bargaining in shaping regional wage differences in the Spanish labour market. Using microdata from the Spanish Structure of Earnings Survey, our results reveal that there are significant inter-regional wage differences for similarly skilled workers. These differences are present throughout the whole wage structure and can be explained by both competitive and non-competitive factors, such as insufficient competition in product markets. In this context, industry-level collective bargaining plays a major role in accounting for regional wage differences, a role that in the Spanish case is enhanced due to its unusual regional dimension.     

Collective bargaining under perfect information. The negotiation of national agreements

We structurally estimate a perfect information bargaining model of collective negotiations using data on national agreements for Spain. The model is a stochastic model of sequential bargaining in which we allow for the possibility of negotiations ending without agreement, a common feature in the data. Delays in equilibrium are the result of uncertainty about the surplus to be divided among the players and not of information asymmetries. The model fits the data well regardless of the limitations imposed by the parametric specification adopted. Our results show that agents are patient and that the advantage from proposing is large.JEL Classification: J50, C73, C78We thank Fabian Marquez, Sergio Santillan and Jose Maria Zufiaur for helping us to create the data base on Spanish National Agreements. We also thank Cesar Alonso, Juanjo Dolado, Gautam Gowrisankaran, Maia Guell, Antonio Merlo and participants at the 1999 European Meeting of the Econometric Society for very helpful comments. Jose E. Galdon thanks financial support from the following institutions: European Commission for a TMR Marie Curie Fellowship, Spanish Ministerio de Ciencia y Tecnologia for project BEC2002-00954 and Spanish Ministerio de Educacion, Cultura y Deporte for project PR2004-0057. He also thanks the hospitality of STICERD (LSE) and the IR Section (Princeton University) where part of this work was completed. The usual disclaimers apply.     

Trade and firm heterogeneity in a Schumpeterian model of growth

The present paper explores the effect of trade liberalization on the level of productivity as well as the rate of productivity growth in an R&D-based model with heterogeneous firms. We introduce new and plausible features that are absent in existing studies. First, technical progress takes the form of continual quality improvement of products over time. Second, firm entry and exit are endogenously determined due to creative destruction of products. In this framework, we demonstrate that a lower transport cost or export sunk cost unambiguously reallocates resources to R&D and top-quality product industries from low-quality good industries. This means that trade liberalization increases the rate of technical progress as well as the level of manufacturing productivity. These results are found to be robust in an extended model with population growth without scale effects.     

Outsourcing versus integration at home or abroad and firm heterogeneity

This paper analyzes the location (at home or abroad) and the mode of organization (outsourcing versus integration) of intermediate inputs production, using data on a sample of Italian manufacturing companies and focusing on the role of firm heterogeneity. We find evidence of a productivity ordering where foreign integration is chosen by the most productive firms and domestic outsourcing is chosen by the least productive firms; firms with medium-high productivity choose domestic integration, firms with medium-low productivity choose foreign outsourcing.     

Equilibrium unemployment, search behaviour and unemployment persistency

Unemployment persistency and high equilibrium unemployment isoften assumed to be caused by rigidities and low search efficiencyin the labour market, especially in European welfare stateswith generous income replacement schemes. These arguments aretested on data from Sweden, an old welfare state with a longperiod of full employment that has changed into a situationwith high unemployment. Data show a clear and very strong unemploymentduration dependency, but it is not possible to prove that thisis a result of low employability among the long-term unemployed.Getting a job is most of all associated with relative qualifications,recall expectations and local labour market conditions, andnot with search behaviour or high wage demands. It is arguedthat unemployment duration when unemployment is high can bestbe understood as a selection process rather than a search process,and that econometric estimations of equilibrium unemploymentare too pessimistic about the potential for an expansive economicpolicy. It is also argued that an active labour market policyis a more efficient compliment to such a policy than changesin income replacement ratios.