Sectoral Wage Rigidities and Labour and Product Market Institutions in the Euro Area

We estimate wage Phillips curve relationships between sectoral wage growth, unemployment and productivity in a country-industry panel of euro area countries. We find that institutional rigidities – such as labour and product market institutions and regulations – limit the adjustment of euro area wages to unemployment, in both upturns and downturns, particularly in manufacturing and, to a lesser extent, in the construction and service sectors. In addition, there are further limitations in the response of wages to changes in unemployment during economic downturns which suggests that euro area wages are also characterised by significant downward wage rigidities, especially in the manufacturing sector. These results are robust to specifications that account for factors that may affect structural unemployment (such as duration-dependent unemployment effects), as well as changes in the skill composition of employment that may affect the evolution of aggregate wages. The results also hold for panels including or excluding the public sector (where wages may be determined differently to the private sector also due to the effects of fiscal consolidation on public sector wages during the crisis). From a policy perspective, reforms in product and labour markets which reduce wage rigidities can facilitate employment growth and enhance the rebalancing process in the euro area.     

Choosy Youth or Unwanted Youth? A Survey of Unemployment

This paper examines structure and change in unemployment in Indonesia from the 1970s through to 1996 The analysis focuses on high unemployment rates among urban youth, set in the context of similar problems experienced in other developing countries. It also deals with some of the conceptual and measurement issues. It is concluded that high youth unemployment is partly a queuing phenomenon among middle class families, related to processes of job search and wage structure. But rates of under-utilisation are also high among children of poorer households in the working age papulation Over time, the paper finds considerable stability in the structure of unemployment, with some tendency for overall rates to increase Some rises in unemplnyment were experienced by youth with either low educational status or tertiary qualifications, and by women Explanations include increased minimum wages and a slowdown in manufacturing activity, although changing definations have also played a part.     

Migration: A theoretical comparison on countries’ welfare

We compare the effects of migration on the production of public goods, on income taxes, and on the welfare of residents in the sending and receiving countries. Migration is driven by income differences between countries. Alternative wage adjustment scenarios are considered: fully flexible wages, upward rigidity, and unemployment. We show that in all scenarios, emigration is detrimental to welfare for the origin country. Migration improves welfare for the destination country in the presence of flexible wages and upward rigidity, but it has detrimental effects in the presence of unemployment.     

Product market competition, unemployment and income disparities

Product Market Competition, Unemployment and Income Disparities. — We discuss how promoting competition in product markets affects unemployment and wage differentials. We examine a general equilibrium model with real wage rigidities in labor markets and market power in product markets. We illustrate how more intense competition reduces unemployment. A decrease of markups would induce an increase of real wages if real wages were flexible. This enables the employment of more low-skilled people above a real reservation wage. More intensive competition, however, widens wage and income differences between low-skilled and high-skilled workers. Differences of income distributions across countries could also be caused by differences in the intensity of product market competition.     

Labour Market Flexibility,Wages and Incomes in Sub‐Saharan Africa in the 1990s

Abstract: This paper provides an overview of how African labour markets have performed in the 1990s. It is argued that the failure of African labour markets to create good paying jobs has resulted in excess labour supply in the form of either open unemployment or a growing self‐employment sector. One explanation for this outcome is a lack of labour market ‘flexibility’ keeping formal sector wages above their equilibrium level and restricting job creation. We identify three attributes of labour market flexibility. First, whether real wages decline over time; secondly, the tendency for wages to adjust in the face of unemployment; and thirdly, the extent of wage differentials between sectors and/or firms of various size. Recent research shows that real wages in Africa during the 1990s may have been more downwardly flexible than previously thought and have been surprisingly responsive to unemployment rates, yet large wage differentials between formal and informal sector firms remain. This third sense of the term ‘inflexibility’ can explain a common factor across diverse African economies — the high income divide between those working in large firms and those not. Those working in the thriving self‐employment sector in Ghana have something in common with the unemployed in South Africa — both have very low income opportunities relative to those in large firms.     

Race and sex differences in the effects of early unemployment on wages

Youth unemployment is shown to have significant depressing effects on black long-run earnings over and above the loss in work experience which accompanies unemployment. Estimates were similar for men and women, showing that for each week of unemployment black youth incurred early in their work careers, wages were reduced by about one half a percentage point five years later. A six month bout with unemployment in 1979 was related to a 13 percent drop in wage rates five years later. For white youth, joblessness, but not unemployment per se, had a significant negative impact on subsequent wage rates.     

Institutional wage-setting,labour demand and labour supply: Causal estimates from a South African pseudo-panel

Unemployment in South Africa has multiple causes. This article uses a district pseudo-panel to estimate the elasticity of labour demand, labour supply and unemployment with respect to wages. We assess whether hiring decisions are more sensitive to increases in wages of low-paid workers than high-paid workers, and whether wage growth prompts entry into the labour market. These channels combine to result in the positive causal effect of wage growth on unemployment. The research investigates whether these effects are dominated by districts in which unionisation rates are high and employment is concentrated in large firms. Wage growth of middle-paid to highly paid workers – as opposed to low-paid workers – reduces local labour demand and raises local unemployment. Bargaining arrangements correspond closely to the spatial wage distribution; in turn, a large part of the impact that wage growth has on labour market outcomes is determined by these wage-setting institutions.     

The economic effects of the 1920 eight-hour working day reform in Sweden

In 1920, the working day in Swedish manufacturing and services was cut from 10 to 8 hours without wages being cut correspondingly. Since workers demanded and got the same daily wage working 8 hours as they had with 10, real hourly wages increased dramatically; they were about 50% higher in 1921–1922 than they had been in 1919. This is the largest wage push in Swedish history, and this paper studies the consequences for profits, investments, capital intensity and unemployment. In traded manufacturing employers responded by increasing capital intensity and did not compensate for rising wages by raising prices, which led to a combination of jobless growth and low profit rates in the 1920s. Firms in non-traded manufacturing and services could raise prices and conserve profitability to a higher degree. In total, the effects of the reform were pro-labour. We discuss the implications for our understanding of interwar wages and employment, the literature on the decrease in inequality found in most industrial countries around 1920 and the rise of the ‘Swedish model’ in the 1920s and 1930s.     

Unemployment in LDCs: Worker heterogeneity, screening, and quantity constraints

Unemployment in many less developed countries is characterized by a significant urban-rural wage differential coexisting with high urban unemployment. This may be consistent with optimization when there is imperfect information about a worker's ability, and abilities are heterogeneous. Firms know only the average quality of workers in the labour pool. High urban wages induce immigration of workers from rural areas, improving the average quality of the urban labour pool which has been depleted of high ability workers by previous screening. Hence, both sides of the market way find high non-market-clearing wages optimal. Quantity constraints from imperfect capital markets may strengthen this effect.     

Unemployment with trade and firm heterogeneity

By specifying the setting of the footloose capital model with firm heterogeneity, this paper examines the effects of trade liberalization on unemployment through two different mechanisms: firstly, we embed search frictions into the labor market; and secondly, we consider fair wages as the source of unemployment. In the model with search frictions, we find that both the expected wage and employment rate could be higher for a small country with better search technology. In the fair wage setting, the results show that an increase in trade freeness increases the unemployment rate of the large (small) country when the trade freeness is sufficiently high (low). Finally, we try to compare the welfare levels under different scenarios and discover that unemployment may lead to a deterioration in the welfare gains from trade.     

Legal Minimum Wages and Employment Duration

We estimate the effect of minimum wages on employment duration using event history data from the 1988-1994 rounds of the National Longitudinal Survey of Youth. Existing literature takes two alternative tracks: Some studies predict reduced turnover due to rents created by minimum wages, others focus on the expected increase in turnover due to reduced job amenities and imperfect information. We find that for men, the net effect of a minimum wage depends on its magnitude relative to the typical wage in the local labor market. We find some evidence that where the minimum wage is low, separation rates for men hired at the minimum wage are reduced. We also find that as the relative value of the minimum wage rises, separation hazards increase. We interpret these findings as evidence that rents may accrue to minimum wage workers, but that the job matching process is undermined when the minimum wage binds.     

Unemployment trends in some American cities with living wage ordinances

By early 2003, more than 90 American cities and counties have passed laws, called Living Wage Ordinances, which require companies that have contracts with these municipalities and/or receive tax subsidies to pay their workers a wage above the federal minimum rate. The levels of these wages and the types of workers who are affected by these living wage ordinances are reviewed. Also examined are the major arguments for and against these laws. This study looks at the trends in unemployment rates in 40 cities that have enacted Living Wage Ordinances. Each city's unemployment rate is compared to that in its metropolitan area, its state, and the nation. The study reveals that experiences are mixed. Some cities with living wage ordinances have experienced an improvement in their relative employment situation. Other cities have experienced just the opposite.     

The Balassa-Samuelson model with job separations

We incorporate sectoral job separation rates in a small open economy model to examine the Balassa-Samuelson (B-S) effect. Unequal separation rates give rise to compensating wage differentials. We simulate the model for Japan and replicate a feature of its economy that the nontradeables sector has higher wages and a higher separation rate compared to the tradeables sector. With productivity growth in the tradeables sector, labour moves from the tradeables sector to the nontradeables sector if tradeables and nontradeables are complements in consumption. The B-S effect is dampened. With a higher separation rate in the nontradeables sector, higher wages in the nontradeables sector amplifies this labour movement. Nevertheless, unemployment always falls due to a positive income effect. In contrast, the effect of productivity growth in the nontradeables sector is to lower the real exchange rate and raise unemployment.     

WAGES THROUGH BOOMS AND RECESSIONS: A CASE STUDY OF ZIMBABWE

This paper examines developments in the wage system in Zimbabwe. The analysis focuses on the wage formation process and wage differentials. The paper observes that real wages have been flexible and have fallen sharply. Wage inflexibility is thus ruled out as a cause of unemployment. The collapse of wages has given rise to non‐standard labour market practices as workers try to cushion themselves against rapid wage declines. Wages also exhibit wide gender, racial and occupational differentials. The paper also argues that a wage policy in Zimbabwe must be pillared on decentralised, coordinated and synchronised collective bargaining.     

A Classroom Unemployment Compensation Experiment

This classroom experiment demonstrates how unemployment compensation can affect unemployment rates and wages. Students take the roles of workers and employers who use double oral auction labor markets to negotiate employment contracts. The instructor takes the role of a government that offers progressively higher levels of unemployment compensation. The experiment generates data that students can analyze to test the general predictive power of economic theory. Students also use their data to test the specific hypothesis that higher unemployment compensation increases the unemployment rate and causes wage compression.     

Are Wages Too Low? Empirical Implications of Efficiency Wage Models

Firms may pay efficiency wages to enhance productivity. The conventional presumption is that efficiency wages are inefficiently high because they lead to unemployment that is also inefficiently high; government policies that lower wages raise output. Using a simple and general efficiency wage model, this paper finds a necessary and sufficient condition for the opposite conclusion. If the condition holds, wages are inefficiently low, leading to productivity that is also inefficiently low. It is the high-wage policies that raise output, even if they also lower employment. Published empirical results support the condition. No evidence is found for the conventional presumption.     

Efficiency Wages,Interfirm Comparison,and Unemployment

The paper presents an efficiency wage model where worker effort depends on own wages relative both to wages of other workers in the firm and to similar workers in other firms. First, we show how the Solow conditions are modified if internal comparison effects are at work. Second, we discuss the effect of internal wage comparison on wage inequality within firms. Third, we study unemployment and relative wage determination within a general equilibrium model, and analyze the effect of technological change and various tax policies on equilibrium unemployment and relative wages. Finally, the short-run effects of aggregate demand shocks are analyzed.     

WAGE BARGAINING, HOLDOUT, AND INFLATION

In many countries it is customary that production continuesunder the terms of the old contract during wage negotiations(holdout), unless a work stoppage is initiated This paper analysesa model where the workers deliberately work less efficientlyduring a holdout, while the firm reduces bonus payments If aholdout is more costly to the firm than to the workers, thewage bargaining will result in a nominal wage increase. Themodel implies a Phillips curve that consists of two verticalparts, one with high inflation and low unemployment and onewith low inflation and high unemployment.     

INSIDER FORCES, ASYMMETRIES, AND OUTSIDER INEFFECTIVENESS: EMPIRICAL EVIDENCE FOR NORWEGIAN INDUSTRIES 1966-87

Using panel data for 117 Norwegian industries from 1966 to 1987,we show that industry wages are significantly affected by industryperformance. Insider effects are more important in expandingindustries as compared to declining ones, and most responsiveto insider variables in good times. Industry wages are significantlyaffected by unemployment, and the estimated unemployment coefficientis close to estimates obtained using time series data. Thereis no long-run wage resistance, and the main long-run determinantsof industry wages are the outside wage and own profitability.     

The dynamic effects of shocks to labour markets: evidence from OECD countries

This paper uses a set of plausible long-run identifying restrictionson a three-variable system, including output growth, real wagegrowth, and the unemployment rate, to isolate three independentstructural shocks which drive fluctuations in those variablesin a sample of 16 OECD countries during 1950-96. These shocksare interpreted as aggregate demand, productivity, and laboursupply disturbances. As a by-product of the previous analysis,the cyclical behaviour of real wages in response to a demandshock is re-examined and two indices of real wage rigidity arederived.