Reservation wages, market wages and unemployment: Analysis of individual level panel data

Using individual level panel data, we analyse the divergence between the reservation wages of individuals who are out of work and their predicted market wages, focusing upon identifying the factors that influence the potential divergence. In addition, using propensity score matching techniques, we explore the implications of such divergences for future employment and wages. Our findings suggest that having reservation wages that are high relative to the predicted market wage influence both future employment and future wages.     

Caste discrimination and transaction costs in the labor market: Evidence from rural North India

This paper is an empirical attempt to quantify caste-based discrimination in the labor market using household data taken from rural North India. In the regression analysis, transaction costs associated with entry into the labor market and reservation wages are estimated simultaneously along with market wages. The estimation results provide evidence of the existence of transaction costs in the labor market and discrimination against backward classes with regard to access to regular employment. In line with previous studies, the results suggest that the achievements of India's reservation policy so far have at best been limited. In addition, a comparison between the estimates from the model employed in this paper and conventional (reduced-form) approaches shows that discrimination in labor market entry is likely to be underestimated in the conventional reduced-form approaches.     

Training and worker effort: a signalling perspective

Abstract This paper analyzes the interaction between firms’ investment in general skills training and workers’ incentives. It shows that when a firm has an informational advantage over its workers, its provision of free general skills training can serve as a signal that there will be a long‐term relationship between the firm and its workers. This signal induces the workers to exert more effort in learning firm‐specific skills, which enhances the firm's profits. In contrast with most of the existing literature, the model implies that firms may provide free general skills training even if there is no labour market friction.     

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.     

Wage bargaining and turnover costs with heterogenous labor and perfect history screening

We study effects of mobility costs in a model of (Nash) wage bargaining between workers and firms, with instantaneous matching, heterogeneous workers, identical firms and free firm entry, and where firms can screen workers perfectly according to their previous work history but not their actual productivity. We derive the employment level and the minimum worker quality standard, in the market solution, and in the efficient solution established by a social planner. When workers have positive bargaining power, there is always some inefficient unemployment among desired workers in the market solution. The lowest hiring standard chosen by firms is higher than the planner's standard when firing costs are high relative to hiring costs, but may be lower in the opposite case. We show that any higher established hiring standard corresponds to a market equilibrium. The model explains a tendency for a high initial unemployment rate to remain high, particularly for low-skilled workers.     

A note on the life-cycle search and matching model with segmented labor markets

Recently, there has been renewed interest in labor search and matching models that incorporate a life-cycle structure by assuming finite horizons. Existing studies provide detailed analyses on the age dynamics of job creation and destruction, assuming that workers of all ages search for jobs in the same market. This paper examines a related environment that has drawn less attention, where the labor market is exogenously segmented by age. The paper finds sufficient conditions for the model to yield unambiguous predictions on the age profiles of key variables, and compares them with the corresponding conditions in models with a single market. The paper further examines the age profiles of these key variables in the efficient allocation. In particular, with no persistence in idiosyncratic match productivity, the efficient allocation is found to exhibit monotonic age profiles for the job finding and separation rates.     

Banking crises,labor reforms,and unemployment

Using a sample of 97 countries spanning the period 1980–2008, we estimate that banking crises have, on average, a large negative impact on unemployment. This effect, however, largely depends on the flexibility of labor market institutions: while in countries with more flexible labor markets the impact of banking crises is sharper but short-lived, in countries with more rigid labor markets the effect is initially more subdued but highly persistent. These effects are even larger for youth unemployment in the short term, and long-term unemployment in the medium term. Conversely, large upfront, or gradual but significant, comprehensive market reforms have a positive impact on unemployment, albeit only in the medium term.     

Industry structure and labor market flexibility in the South African manufacturing sector: A time series and panel data approach

This paper presents a joint analysis of labor market flexibility and product market structure. Our investigation confirms earlier results of imperfect competition in South African manufacturing where we find an average mark-up of 50% for the period 1970 to 2004 that is without consistent trend over time. The contribution of the paper is to provide a theoretically grounded means of linking output market conduct to labor market flexibility. We infer the proportion of labor associated with rigidities in the labor market from the mark-up, and find that two thirds of total labor employed in South African manufacturing is associated with rigidities. We find that this proportion falls during the 1980s and rises during the 1990s, suggesting an increase in labor flexibility followed by a decrease.     

Age-differentiated minimum wages in developing countries

The fact that minimum wages seem especially binding for young workers has led some countries to adopt age-differentiated minimum wages. We develop a dynamic competitive two-sector labor market model where workers with heterogeneous initial skills gain productivity through experience. We compare two equally binding schemes of single and age-differentiated minimum wages, and find that although differentiated minimum wages result in a more equal distribution of income, such a scheme creates a more unequal distribution of wealth by forcing less skilled workers to remain longer in the uncovered sector. We also show that relaxing minimum wage solely for young workers reduces youth unemployment but harms the less skilled ones.     

The effects of implicit contracts on wages: Evidence from the Japanese labor market

This paper tests whether wages in Japan’s labor market are determined by current or past labor market conditions. The empirical results are consistent with a model suggesting that labor market mobility may be limited and costly in Japan for men.     

Remittances, schooling, and child labor in Mexico

This paper studies the effects of remittances from the U.S. on child labor and school attendance in recipient Mexican households. We identify these effects using the impact of the 2008-2009 U.S. recession on remittance receipts. The methodology employed is a differences-in-differences strategy that compares households that were remittance recipients before the crisis with never-recipient households. To avoid possible selection problems, we instrument for membership in the remittance recipient group. We find that the negative shock on remittance receipts caused a significant increase in child labor and a significant reduction of school attendance.     

Is ethnic discrimination due to distaste or statistics?

Employing a vignette experiment, we test the empirical importance of key attitudes underlying the models of taste-based and statistical discrimination in explaining ethnic hiring discrimination. We find that employer concern that co-workers and customers prefer collaborating with natives drives discrimination.     

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.     

Economic transition, higher education and worker productivity in China

We investigate the role of education on worker productivity and firms' total factor productivity using a panel of firm-level data from China. We estimate the returns to education by calculating the marginal productivity of workers of different education levels based on estimates of the firm-level production function. We also estimate how the education level of workers and CEO contributes to firms' total factor productivity. Estimated marginal products are much higher than wages, and the gap is larger for highly educated workers. Our estimate shows that an additional year of schooling raises marginal product by 30.1%, and that CEO's education increases TFP for foreign-invested firms. Estimates vary substantially across ownership classes, the effect of schooling on productivity being highest in foreign-invested firms. We infer that market mechanisms contribute to a more efficient use of human capital within firms.     

Risk compensation in wages – a replication

We use data from Germany, The Netherlands, Portugal and Spain to test for the effect of earnings variation on individual earnings. We replicate estimates for the USA and find that the variance of earnings in an occupation affects individual wages positively while the skewness of earnings has a negative effect. Both results are in conformity with wage compensation for risk averse workers. First version received: March 2001/Final version received: July 2002 We are grateful to two anonymous referees for valuable comments.     

Explaining variation in child labor statistics

Child labor statistics are critical for assessing the extent and nature of child labor activities in developing countries. In practice, widespread variation exists in how child labor is measured. Questionnaire modules vary across countries and within countries over time along several dimensions, including respondent type and the structure of the questionnaire. Little is known about the effect of these differences on child labor statistics. This paper presents the results from a randomized survey experiment in Tanzania focusing on two survey design choices: different questionnaire design to classify children work and proxy response versus self-reporting. Use of a short module compared with a more detailed questionnaire has a statistically significant effect, especially on child labor force participation rates, and, to a lesser extent, on working hours. Proxy reports do not differ significantly from a child's self-report. Further analysis demonstrates that survey design choices affect the coefficient estimates of some determinants of child labor in a child labor supply equation. The results suggest that low-cost changes to questionnaire design will potentially clarify the concept of work for respondents.     

Dynamics in transitory and permanent variation of wages in Germany

We employ covariance structure models to decompose the cross-sectional variance of male wages in Germany into its permanent and transitory parts. We find that the steep growth of cross-sectional inequality during the early 2000s is predominantly driven by transitory factors.     

Termination restrictions and investment in general training

Conditional separation payments efficiently increase firms’ investment in general training if the latter is not directly contractible. Since training is vested in the worker on separation, a firm's return to training is zero when a match ends or, more generally, when the firm's outside return is binding. Large enough conditional separation penalties ensure that, independently from outside opportunities, the ex post situation is one of bilateral monopoly. This allows the firm to capture a positive share of the return to the general component of training in all states of nature. A fixed wage contract and large enough separation penalties ensure that the firm's investment decision is fully efficient if training is general in Becker's (1964) sense.     

Population ageing,time allocation and human capital: A general equilibrium analysis for Canada

This study explores the long-term impact of population ageing on labour supply and human capital investment in Canada, as well as the induced effects on productive capacity. The analysis is conducted with a dynamic computable overlapping generations model where in the spirit of Becker [Becker, Gary (1965), A theory of the allocation of time, The Economic Journal, Vol. 75, pp. 493–517.] and Heckman [Heckman, James (1976), A life-cycle model of earnings, learning and consumption, The Quarterly Journal of Economics, Vol. 84, pp. 511–544], leisure has a quality-time feature and labour supply and human capital investment decisions are endogenous. The role of human capital in the growth process is based on the framework used by Mankiw et al. [Mankiw, N. Gregory, Romer, David and Weil, David N. (1992), A contribution to the empirics of economic growth, Quarterly Journal of Economics, Vol. 107, no. 2, pp. 407–437]. The paper indicates that population ageing creates more opportunities for young individuals to invest in human capital and supply more skilled labour at middle age. Consequently, the reduction in labour supply of young adults initially lowers productive capacity and exacerbates the economic costs of population ageing. However, current and future middle-age cohorts are more skilled and work more, which eventually raises productive capacity and significantly lowers the cost of population ageing. Finally, these results suggest that the recent increase in the participation rate of older workers might be the beginning of a new trend that will amplify over the next decades.     

Elderly labor supply and fertility decisions in aging-population economies

With a longer life expectancy, individuals who plan to work when they are old may increase the number of their children. Therefore, when individuals choose the time of retirement, the fertility rate may not necessarily decline but even rise.