Price and quantity adjustments in the Austrian labour market

Austria is among the very few countries in the European Union which have managed to maintain comparatively low unemployment rates and high employment rates. This study looks at the price and quantity adjustment mechanisms in the Austrian labour market which may have contributed to this favourable outcome. After reviewing briefly the basic theoretical reasoning an empirical investigation is began into gross flow dynamics in the labour market and the cyclical volatility of employment and unemployment in Austria. In international comparison Austrian unemployment is very stable over the business cycle. This is due mainly to the high sensitivity of the labour force on cyclical conditions and, partly, also on the relatively weak responsiveness of employment to cyclical fluctuations in output, the latter being possibly attributable to the high degree of real wage flexibility in Austria. The study proceeds to show that the long-run elasticity of wages with respect to unemployment is indeed quite high in Austria. However, evidence was also found for outsider effects in the Austrian wage setting process. Relative wage structures, on the other hand, appear to be rather rigid.     

The short-term responsiveness of consumer expenditures in the Austrian economy

Zusammenfassung Ziel dieser Arbeit ist es, die kurzfristige Reagibilität von verschiedenen Konsumentenausgaben innerhalb eines theoretischen Rahmens, der alle Ausgabenkategorien symmetrisch behandelt, zu schätzen. Angesichts der Beschränkungen, die von den Daten her auferlegt werden, werden nicht alle Ausgabenkategorien in der Analyse berücksichtigt, aber die Parameter der Gleichungen der vernachlässigten Kategorien können kraft der Eigenschaften des Modells als Restgrößen bestimmt werden.Die Parameter der Gleichung für die Ausgaben für nichtdauerhafte Konsumgüter und Dienstleistungen sind konsistent mit der Auffassung, wie sie in der Life-Cycle Hypothese und der Permanenten-Einkommenshypothese formuliert wird, daß diese Konsumausgaben eher vom Vermögen als von der Liquidität beschränkt sind, und dem langfristigen Trend des verfügbaren Einkommens folgen. Dagegen reagieren die Ausgaben für dauerhafte Konsumgüter und die Aufnahme von Konsumkrediten sehr stark auf Erhöhungen der laufenden Einkommen.Die gesamten Konsumausgaben reagieren jedoch eher zögernd auf Einkommensänderungen, auch wenn diese als permanent betrachtet werden. Ein Anstieg der Einkommen um 1% bewirkt im Durchschnitt der folgenden vier Quartale eine Veränderung der Konsumausgaben um etwa 1/2%. Die Möglichkeit, die Wirtschaft durch eine flexible Handhabung von Änderungen in den Einkommensteuersätzen und in den Transfereinkommen zu stabilisieren, sind daher relativ beschränkt.     

An investigation into Austrian export pricing: Price taking or price setting of a small open economy?

Zusammenfassung Aufgrund der existierenden empirischen Belege wird Österreichs Exportindustrie überwiegend als Preisnehmer auf Auslandsmärkten angesehen. Dies entspricht auch der populären Kleines-Land-Annahme theoretischer Formulierungen. In der bisher detailliertesten einschlägigen Untersuchung schließt dagegenMarin (1983) auf Basis eines Aufschlagspreismodells auf vornehmliche Preissetzerschaft österreichischer Exporteure.In der vorliegenden Arbeit wird einleitend gezeigt, daß die Existenz positiver Aufschläge auf die Durchschnittskosten für die kurze Frist mit unterschiedlichen Marktformen, sowohl mit unvollkommenem wie auch vollkommenem Wettbewerb, vereinbar ist. Ein Test auf Aufschlagspreissetzung ist daher kein entsprechendes Diskriminierungskriterium. Für die eigene Untersuchung wird deshalb explizit von bestimmten Marktformen ausgegangen, für die entsprechende Preisgleichungen abgeleitet werden. Auf dieser Grundlage werden die ökonometrischen Tests auf relativ niedrigem Aggregationsniveau (Basis: 48-Sektoren-Input-Output-Tabelle) durchgeführt.Dabei lassen sich etwa fünf Branchen als Preisnehmer, maximal vier als oligopolistische Preissetzer und etwa sechs Sektoren in quasi-monopolistischer Marktstruktur identifizieren. Weitere Resultate können als Hinweis aufgefaßt werden, daß die letzten beiden Branchengruppen allerdings aur Märkten mit relativ geringen Preissetzungsspielräumen agieren. Eine Sichtung der zugeordneten Branchen zeigt, daß einerseits vor allem Grundstoffindustrien als Preisnehmer und andererseits eher Branchen mit höherem Verarbeitungsgrad als Preissetzer anzusehen sind.

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We would like to thank the anonymous referees for valuable comments on the paper and J. Richter who kindly provided a large set of disaggregate export and import price data. The usual proviso applies.     

Price distortions,financing constraints and second-best investment rules in the transportation industries

This paper analyzes the second-best pricing and investment rules to be followed in the transportation industries in the presence of intermodal competition, exogenous price distortions, and financing constraints, using both theoretical and simulation analysis. It shows that price distortions and financing constraints in one mode will not only affect the investment rules in that mode, but will also affect the pricing rules and investment decisions in all other modes. While the theoretical discussion indicates that the second-best pricing and investment rules are quite complex, the simulation analysis indicates that the benefit function is relatively flat, suggesting that the costs of using simpler first-best rules may be relatively small.     

Price controls in an open economy

Wage and price controls have been increasingly called for as Western economies have experienced periods of stagflation. Part of their attractiveness has been due to the belief that they are an appropriate instrument to deal with a country's unsatisfactory balance-of-payments position. This paper evaluates the appropriateness of an incomes policy in an open economy. An optimally structured incomes policy, derived for a simple inflation model, is examined under alternative exchange rate regimes. The model, in the tradition of models by Gordon, Hicks, and Okun, is characterized by two output markets-one a flexible price market and one characterized by markup pricing-and by a single labor (input) market. This model is then used as the constraint set in a dynamic optimization problem. Both analytical and simulation results are presented. The results suggest that a direct price control program is not appropriate in an open economy.     

Price dynamics in an exchange economy

The pure exchange model is the foundation of the neoclassical theory of value, yet equilibrium predictions and price adjustment dynamics for this model remained untested prior to the experiment reported in this paper. With the exchange economy replicated several times, prices and allocations in most experiment sessions adjust toward the competitive equilibrium in continuous double auction trading, though adjustment is much slower than in previous commodity flow (or perishable good) double auction market experiments. Price adjustment is evaluated by comparing its extent within each market replication (or trading period) to its extent across trading periods. More price adjustment occurs within trading periods than across trading periods, so price adjustment data are evaluated with the disequilibrium Hahn process model (Hahn and Negishi in Econometrica 30:463–469, 1962) of within-period trades. This paper introduces a stochastic version the Hahn process model and demonstrates that a linear approximation to this stochastic model yields an autoregressive process with a near unit root when the adjustment rate is low. In effect, the autoregressive price adjustment model studied extensively by time series econometricians over the past 30 years can be viewed as a reduced form of a stochastic disequilibrium exchange economy price adjustment model. Estimation of the model demonstrates that price adjustment in the exchange economy experiment is considerably slower than in economies without income effects, which suggests that the price discovery process may be a significant factor in the slow adjustment documented by applied econometricians.     

WIFO-JMX—An annual econometric macro model of the Austrian economy

Zusammenfassung Das Jahresmodell WIFO-JMX, das in der vorliegenden Arbeit vorgestellt wird, ist primär ein mittelfristiges Modell. Bei seiner Spezifikation wurde daher der Angebotsseite große Aufmerksamkeit gewidmet. Wir verwenden eineCobb-Douglas Produktionsfunktion als langfristige Planungsbeziehung. Von dieser Produktionsfunktion werden dann Faktor-nachfragegleichungen für Arbeit und Kapital abgeleitet. Die Identität der Produktionsfunktionsparameter in beiden Faktornachfragefunktionen garantiert die Konsistenz der langfristigen Eigenschaften dieser Beziehungen. Weiters erlaubt diese Spezifikation Faktorsubstitution als Reaktion auf änderungen in den relativen Preisen. In einem mittelfristigen Modell sollte dieser Aspekt nicht vernachlässigt werden. Die so geschätzten Faktornachfragefunktionen wurden dann ihrerseits verwendet, um verschiedene Auslastungsmaße herzuleiten. Wir unterscheiden hier zwischen Kapazitäts-, Vollbeschäftigungs- und Potentialproduktion.Es verwundert nun nicht weiter, daß ein mittelfristiges Modell kurzfristige Konjunkturschwankungen eher ungenau abbildet. Da aber gerade kurzfristige Prognoseprobleme im Institut für Wirtschaftsforschung breiten Raum einnehmen, haben wir eine spezielle Prognoseversion von WIFO-JMX entwickelt. Diese Version ist in ihrer theoretischen Struktur wesentlich einfacher. Wir ließen hier das Produktionsfunktionskonzept fallen, was den Simultanitätsgrad des Modells beträchtlich reduzierte. Erste Tests der Treffsicherheit der mit dieser Modellversion erstellten Prognosen verliefen zurfriedenstellend.Es soll jedoch nicht verschwiegen werden, daß beide Modellversionen noch recht unvollständig sing. Der monetäre und der öffentliche Sektor fehlen zur Zeit völlig, die Zahlungsbilanz wird gegenwärtig äußerst rudimentär behandelt. Wir beabsichtigen, dieses Basismodell nun nach und nach zu einem vollständigen Gleichungssystem der österreichischen Wirtschaft auszubauen. Dabei ist uns völlig bewußt, daß der vielleicht schwierigere Teil der Arbeit noch vor uns liegt. Denn für den monetären und den öffentlichen Sektor müssen wir Ansätze entwickeln, die den von ausländischen Erfahrungen hier teilweise stark abweichenden österreichischen Gegebenheiten Rechnung tragen.     

Sustainability of Austrian public debt: a political economy perspective

Sustainability of Austrian public debt is investigated in the context of political objectives such as stabilizing the business cycle, increasing chances for being re-elected and implementing the ideologies of political parties. Several tests indicate that Austrian fiscal policies were sustainable in the period 1960–1974, while from 1975 on, public debt grew much more rapidly. The development of public debt in Austria seems to be driven not primarily by ideology, but by structural causes and a shift in the budgetary policy paradigm. We find some empirical evidence that governments in Austria dominated by one party run higher deficits than coalition governments. There are no indications of a political business cycle.     

Price level targeting and the delegation issue in an open economy

A weight-conservative central banker setting policy with discretion and stabilizing the real exchange-rate-adjusted (REX) price level and the output gap can replicate the behavior of the rate of REX inflation and the output gap under policy from a timeless perspective.     

Price changes and optimum taxation in a many-consumer economy

A general equilibrium model of a many-consumer economy with commodity taxation is set up, and comparative static effects of small perturbations are studied. Production involves fixed factors which can be interpreted as repositories for pure profits, thus allowing taxation of profits at arbitrary rates. The question of whether the best local improvement starting from a production efficient point will lead to inefficiency is studied. The main concern is whether it will be optimal to rely on profit taxation alone given that it is feasible to do so. An affirmative answer is obtained in special cases where such policy yields the first best, and when the consumers are scaled replicas of one another.     

Capital gains taxation in an economy with an ‘Austrian sector’

This paper examines the effects of a proportional capital gains in an economy with an Austrian sector (with wine and trees) and an ordinary sector. We analyze the effect of capital gains taxation (on both an accrual and a realization basis) on the efficiency with which resources are used within the Austrian sector. Since time is the only input which can be varied in the Austrian sector, this amounts to looking at the effect of capital gains taxation on the harvesting time or selling time of assets. Accrual taxation decreases the selling time of Austrian assets. Realization taxation decreases the selling time of some Austrian assets and leaves it unchanged for others. Inflation further reduces the selling time of assets taxed on an accrual basis; often, but not always, inflation increases the selling time of Austrian assets taxed on a realization basis. We also examine the effect of the special tax treatment of capital gains at death and find that the current U.S. tax system, under which capital gains taxes are waived at death, encourages investors to hold assets longer.In contrast to these results — which suggest that the capital gains tax can reduce the holding period of an asset — we show that there is a sense in which such taxes (at least when levied on a realization basis) discourage transactions and increase holding periods. It is never profitable to change the ownership of an Austrian asset between the time of the original constraint and the ultimate harvesting of the asset for final use.Capital gains taxation diverts resources from the Austrian sector to the ordinary sector. The effects on the efficiency of the allocation of investment between sectors are complicated and not easy to summarize.     

Price transmission and local market power: empirical evidence from the Austrian gasoline market

We analyse the impact of local market power on price margins and different dimensions of price adjustment dynamics (speed and asymmetry of price transmission) using data for a large number of individual gasoline stations in Austria. Specific attention is paid to threshold effects in price adjustment. Our results clearly suggest that the speed of price transmission between the Brent crude oil index and retail diesel prices is higher in a more competitive environment. While evidence on the relationship between local market power and asymmetries in the speed of price adjustment is mixed, our findings regarding asymmetries in price thresholds are clear: in regions where competition from neighbouring rivals is weak and/or consumers’ price elasticity of demand is low (stations located on the highway), positive thresholds significantly exceed negative ones, which corresponds to the ‘rockets and feathers phenomenon’. As expected, we observe that prices are lower in more competitive local markets.     

Saving government failure theory from itself: recasting political economy from an Austrian perspective

The economic approach to politics revolutionized the way scholars in economics and political science approached the study of political decision-making by introducing the possibility of government failure. However, the persistent and consistent application of neoclassical models of economics also seemed to suggest that once the full costs were accounted for, this failure was an illusion. This paper counters these arguments, typically associated with George Stigler, Gary Becker and Donald Wittman, by focusing on the underlying economic theory. We develop an alternative model of political economy grounded in the Austrian conception of the dynamic market process.

Price distortion and income dispersion in a labor-managed economy: Evidence from Yugoslavia

Although the standard literature on a labor-managed economy implies price distortions and spillovers of profits into wages, the evidence obtained for the Yugoslav economy does not support these predictions. In particular, price distortions in the mid-1970s are found to be small. Price deviations estimated by means of linear price models permit the calculation of excess profits and permit testing of whether they spill over into incomes. Again, contrary to what the standard theory predicts, only a small fraction of such profits is transferred into incomes.     

Tax distortions in Sweden and the United States

We calculate the welfare costs of distortionary taxation (including inflation) in models calibrated for the United States and Sweden. The welfare costs are calculated using comparative steady state as well as dynamic analysis, where we take the costs of transition from the distorted to the optimal steady state into account. We also calculate the welfare costs of adding stochastic fluctuations. Our main finding is that the total welfare costs of the distortionary taxes including the distortionary effects of inflation are about five times higher in Sweden than in the United States. Meanwhile, stochastic fluctuations in policy turn out to have a relatively small impact on welfare.     

Ricardian equivalence and fiscal distortions in the Dominican Republic

This paper tests the Ricardian equivalence hypothesis in the context of the Dominican Republic (DR). The results rejected the Ricardian theorem but a weaker version is shown to have significant implications for the DR. If the government borrows to increase spending, private consumption is crowded out and the economy will suffer in the long run. The outcome is worst if the government borrows to deliver a tax cut. In particular, for every RD$ 1.00 of additional debt incurred to finance government primary spending, private consumption and gross domestic product (GDP) fall by a meaningful RD$ 2.15 and RD$ 1.15 respectively. If the debt is used to finance the tax cut, the fall is RD$ 2.15 in both consumption and output. Interestingly, if the government uses taxes to cover a budget deficit, the effect is neutral and consistent with Ricardian equivalence. The paper argues that fiscal distortions are in part responsible for these multipliers. Distortions are estimated to be 21 % coming from different sources including taxes evasion and fiscal drainage. These findings suggest that the DR could benefit from either reducing the level of fiscal distortions or the size and scope of the Dominican government. If, however, the government continues to pursue an active fiscal role under the current environment, it will generate an unnecessary burden to consumption and economic growth.     

Price setting & price stickiness: A developing economy perspective

We study price setting in Pakistan using 1189 structured interviews of managers organized by the State Bank of Pakistan–Pakistan’s Central Bank. We find that on an annual basis the incidence of price adjustment is three times higher than in developed countries. The remaining price rigidity is explained by the existence of firms’ interactions with the informal sector, strategic interactions with other firms and the uncertainty about temporariness of shocks. The exchange rate and cost-push shocks matter more and are incorporated faster into prices than financial cost and demand-pull shocks. The roughly bimodal nature of price reviewing strategies together with a high frequency of price adjustment imply that monetary policy will carry low potency. Time-dependent price reviewing strategies tend to dominate state-dependent strategies, but the ratio of price reviews to actual adjustment is too high and inconsistent with the moderate levels of inflation experienced by Pakistan.     

Emergence and complexity in Austrian economics

Emergence is often argued to be a deep property of complex systems, with such systems exhibiting wholes that are in some way greater than the sum of their parts. These ideas have played an important part in discussions of spontaneous order within Austrian economics, particularly by Hayek drawing on arguments dating from Mill and Menger, although with other traditions such as that of Böhm-Bawerk not relying on such ideas. Philosophical discussions of these terms are considered that raise questions about the relationship between the emergent whole and the lower level parts that comprise it. A major issue is the role of these ideas and processes within evolution, with Hayek in particular moving strongly towards identifying their linkage, something advocated by many non-Austrian economists and non-economists as well.     

Wage fiexibility and rigidity in the Austrian manufacturing sector

Zusammenfassung Löhne in verschiedenen Industriesparten scheinen nicht in gleicher Weise auf Änderungen im Arbeitsmarkt und in den Gütermärkten zu reagieren. Die vorliegende Studie liefert eine eingehende Analyse der Entwicklung der relativen Löhne in 18 Branchen der Industrie Österreichs. Aus theoretischen Überlegungen ergeben sich drei Bestimmungsgründe: Verschiebungen der Nachfrage auf den Gütermärkten, die Anspannung auf dem Arbeitsmarkt und die Fremdarbeiterquote in der österreichischen Wirtschaft. Die empirischen Ergebnisse für die Lohngleichungen lassen erkennen, daß unterschiedliche Wachstumsraten in den einzelnen Industrien keinen meßbaren Einfluß auf die Lohndifferentiale ausüben und somit nur geringe Bedeutung für die Allokation von Arbeitskräften zwischen den einzelnen Branchen haben können. Dagegen läßt sich der Einfluß der beiden Arbeitsmarktvariablen sehr gut dokumentieren. Ausgehend vom Vorzeichen und der Größe der Koeffizienten dieser Variablen kann die gesamte Industrie in Branchen mit relativ flexiblen bzw. starren Löhnen eingeteilt werden. Diese Einteilung wiederum bietet den Ansatzpunkt für einige Schluß-folgerungen über den Sinn und die Effektivität einkommenspolitischer Maßnahmen.     

International trade and domestic distortions

When full competition prevails in product, labor, and capital markets, positive or negative external trade shocks may be accommodated by the migration of jobs between sectors; the negative impact on some households?? income of lower nominal wages will be more than offset by lower prices of imported final goods. Unemployment, if any, will be temporary, unless labor market rigidities prevent the necessary adjustment. By contrast, we argue that trade shocks trigger a process of creative destruction that necessarily causes distortions in the structure of productive capacity and, hence, market disequilibria. Therefore, the structural change that follows trade shocks can no longer be analyzed within an equilibrium framework. The transition following a shock may be characterized by increasing imbalances, and create scope for policy intervention. The model presented in this paper, which focuses on the time dimension of production and market imbalances, allows us to clarify the debate.