The Impact of Incomes Policy on Aggregate Wage Determination in Australia*

A model of aggregate wage determination for Australia is developed and used to examine the effects of incomes policies on the level of real wages. A theoretical model of wage determination which includes several channels of incomes policy effects is specified and estimated using aggregate data. The results provide strong evidence to support the view that during periods of certain incomes policies there have been important changes in behaviour in the Australian labour market. In particular, during the period of the Prices and Incomes Accord it is estimated that equilibrium real wages were over 5 per cent below what would have been expected from previous experience.     

The trade-off between real wages and employment in an open economy (Belgium)

The purpose of this paper is twofold. First, we discuss the nature and quantitative order of magnitude of the trade-off between real wages and employment in the small open economy Belgium. Second, we draw policy conclusions from our positive analysis, and compare income policies with alternative approaches to employment stimulation (including shorter working hours and currency depreciation).To study the trade-off between real wages and employment, we treat external balance as a binding constraint on demand management. An exogenous increase in real wages, affecting adversely the competitiveness of domestic producers on the export and import markets, impairs external balance. The impact of the wage increase on output and employment is evaluated through the reduction in domestic demand required to restore external balance.At the empirical level, we endeavour to evaluate separately the influence on exports and imports of domestic costs at unchanged capacity levels, and of capacity levels themselves. And we endeavour to evaluate the influence of real wages on capacity levels through scrapping and investment. All evaluations rely on the foreign trade equations of econometric models of the Belgian economy.The conclusions from our empirical investigation are first that estimates of the trade-off between real wages and employment in Belgium are subject to considerable imprecision; second that the short-run elasticity of employment with respect to real wages keeping capacity constant is probably quite small (like -0.2), and definitely less than unity in absolute value; third that the corresponding medium-run elasticity taking into account capacity adjustments is probably sizeable (like -2), and definitely larger than unity in absolute value; and fourth that exchange rate adjustments might not make too much difference, in either the short run or the medium run.Turning to a discussion of policy, we shall argue that these conclusions give support to a policy of constant real labour incomes, of comprehensive efforts to redistribute work through shorter working hours or related schemes, and of selective efforts to slow down capacity scrapping.     

Help the Low Skilled or Let the Hardworking Thrive? A Study of Fairness in Optimal Income Taxation

In a model where agents have unequal wages and heterogeneous preferences, we study the optimal redistribution via an income tax, when the social objective is based on a combination of efficiency and fairness principles, and when incentive issues are taken into account. We show how some fairness principles entail specific features for the optimal taxes, such as progressivity or tax exemption for incomes below the minimum wage.     

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.     

The effects of the minimum wage in Brazil on the distribution of family incomes: 1996–2001

The Brazilian economy has long relied on the minimum wage, having first implemented a minimum in 1940. Shortly after taking office in 2003, Brazil's President raised the minimum wage by 20% and promised to double the value of the minimum wage before his term ends in 2006. The usual rationale for minimum wage increases is to bring about beneficial changes in the income distribution, by raising incomes of poor and low-income families. The goal of this paper is to evaluate the efficacy of the minimum wage in Brazil in bringing about these changes in the income distribution. We examine data drawn from Brazil's major metropolitan areas, studying the years after Brazil's hyper-inflation ended. The estimates provide no evidence that minimum wages in Brazil lift family incomes at the lower points of the income distribution; if anything some of the evidence points to adverse effects on lower-income families.     

The agents of production are the commodities themselves: On the classical theory of production,distribution and value

The paper discusses the classical theory of production, distribution and value as interpreted by Piero Sraffa in his published and unpublished work. The emphasis is on the characteristic features of the theory, including its objectivist orientation; its explanation of all property incomes in terms of the social surplus generated in production conceived of as a circular flow; and its treatment of wages either as paid out of social capital (given inventory wages) or as paid out of the surplus (a given share of wages). The latter concept is traced back to Ricardo's proportional wages.     

Fair allocations in large economies

The purpose of this paper is the study of problems of equity in an economy with many agents. Conditions are given under which every equitable and Pareto optimal allocation is a competitive equilibrium with equal incomes for all agents. The results are also of potential relevance for the literature on incentive compatibility since the allocations that are obained through incentive mechanisms in large economies turn out to be equitable.     

NONSUBSTITUTION THEOREMS FOR A SMALL TRADING COUNTRY

This paper proves a nonsubstitution theorem for small trading economies, under quite plausible conditions. Conditions are established under which the consumption possibility set for an economy that has nontradeable factors of production and nontradeable consumption goods is bounded by a hyperplane, rather than by a curved surface. The theorem allows the possibility that the prices of nontradeable factors, and hence the incomes of their owners, may depend on domestic supplies of nontradeable factors. It is concluded that the equilibrium wage and the equilibrium prices of all consumption goods are independent of domestic endowments or the shape of demand functions. The theorem tends to strengthen the view that, in the absence of trade barriers, differences in real wages across countries cannot be explained by differences in resource endowments.     

The Fallacy of Free Trade *

The purpose of this paper is to explode the myth of free trade. Productivity and real wages in the United States rose sharply between 1950 and 1972, but since then real earnings have been falling in spite of a continuous rise in productivity. It turns out that America was more or less a closed economy until 1972, as its trade/GNP ratio was close to 10%; but since then it has become an open economy. the theoretical model shows how real wages may fall in an open economy, but not in a closed economy, in spite of rising productivity.     

Wage,income and consumption inequality in Japan, 1981–2008: From boom to lost decades

In this paper we document the main features of the distributions of wages, earnings, consumption and wealth in Japan since the early 1980s using four main data sources: the Basic Survey on Wage Structure (BSWS), the Family Income and Expenditure Survey (FIES), the National Survey of Family Income and Expenditure (NSFIE) and the Japanese Panel Survey of Consumers (JPSC). We present an empirical analysis of inequality that specifically considers the path from individual wages and earnings, to household earnings, after-tax income, and finally consumption. We find that household earnings inequality rose substantially over this period. This rise is made up of two distinct episodes: from 1981 to 1996 all incomes rose, but they rose faster at higher percentiles; from 1996 to 2008 incomes above the 50th percentile remained flat but they fell at and below the 50th percentile. Inequality in disposable income and in consumption also rose over this period but to a lesser extent, suggesting taxes and transfers as well as insurance channels available to households helped to insulate household consumption from shocks to wages. We find the same pattern in inequality trends when we look over the life cycle of households as we do over time in the economy. Additionally we find that there are notable differences in the inequality trends for wages and hours between men and women over this period.     

Immiserizing Growth in a Closed Economy

We develop a model with three key features: a factor market distortion, monopoly power in the product market and indivisibilities in consumption. In this setting, multiple equilibria arise, one with high and the other with low equilibrium wages, incomes and output. It is also shown that even in a closed economy, growth may be immiserizing and, finally, that redistribution could be a “rich man's game”.     

Fertility choice and economic growth: Empirical evidence from the U.S.

This paper provides empirical evidence to support the proposition of Barro and Becker [1989] that fertility depends positively on the world's long-term real interest rates and negatively on real wages in an economy linked to an international capital market. The empirical evidence suggests that there is no long-run relationship among fertility choice, real wages, long-term real interest rates, and output growth in the U.S. over the period 1960–95. However, when estimating a VAR model and employing the variance decomposition analysis and the impulse response functions, the empirical results support the endogeneity of fertility choice and the proposition that real wages, long-term real interest rates, and output growth is related to changes in fertility choice. The empirical results have important policy implications and provide an explanation for the decline of fertility in Western countries mainly in the last three decades.The views expressed in this paper are those of the authors and not those of the Bank of Greece.     

Macroeconomic Effects of Reducing Gender Wage Inequality in an Export-Oriented, Semi-Industrialized Economy

The paper presents two short-run, structuralist models of an export-oriented, two-sector, semi-industrialized economy in which women workers are concentrated in export production. The first model analyzes the comparative static effects of an exogenous increase in female wages holding male wages and the exchange rate constant. The second model endogenizes the female–male wage ratio and the real exchange rate, assuming flexible nominal wages and a crawling-peg exchange rate. Either stable or unstable dynamics are possible. In the stable cases, a depreciation policy can either close or widen the gender wage gap.     

COLLECTIVE BARGAINING,AWARENESS OF GENERAL EQUILIBRIUM EFFECTS,AND UNEMPLOYMENT*

We explore the significance of general equilibrium feedback effects for wage‐bargaining. We examine a two‐sector economy and show that if agents only consider labor demand effects low real wages and low unemployment are the consequences. With an intermediate view, i.e., when partial equilibrium effects within a sector are taken into account, high real wages and unemployment result. If all general equilibrium effects are perceived simultaneously, we once again obtain a situation with low wages and unemployment. The results may explain why unemployment is high in some European countries.     

Is income security possible in a capitalist economy? : An agency-theoretic analysis of an unconditional income grant

This paper is an assessment of the economic effects of the replacement of means-tested or employment-status-related state redistributive programs by a basic income grant paid unconditionally to all adults without regard to their employment status or pretransfer incomes. A microeconomic model is developed to identify the effects of such a grant on the institutional mechanisms governing the supply of work by those employed and the implied effects on the level of wages, profitability an investment. Two questions are posed. First, taking account of the implied effects on wages, labor discipline and taxes, is it possible to introduce a basic income grant without reducing the level of economy with maintainance of the level of profitability and so, what is the largest grant consistent with maintainance of the level of profitability and investment? The answer to the first question is affirmative. The answer to the second is that for an economy such as the United States, the profitability and investment maintaining grant is small but hardly insignificant; its implementation would effect a major redistribution of income from the employed and the unemployed to the non-employed.     

PROFIT TAX AND FIRM MOBILITY IN A THREE‐COUNTRY MODEL

We construct a three‐country model that incorporates international relocation by imperfectly competitive firms and examine both the effects of each country's profit tax reduction on the consumption and welfare of all countries, and the incentive for the countries to decrease the profit tax. In such a model, both the terms of trade and international relocation of firms offer the key to understanding the impacts of one country's profit tax policy. In particular, we note that the relocation of firms from the other two countries is positively related to the wage incomes of the third country through a shift in labour demand, and the terms‐of‐trade improvement is not only positively related to the wage incomes, but also negatively related to profit incomes through a shift in world consumption demand. We show that (i) in a three‐country world economy, regardless of the reduction's source, the profit tax reduction of each country leads to relocation of firms away from foreign countries toward its own economy and deteriorates the terms of trade of its economy and (ii) this becomes a ‘beggar‐thy‐neighbour’ policy in the sense that it lowers the welfare of the other foreign countries.     

Optimal Income Taxation With Quasi-Linear Preferences Revisited

Properties of the optimal income tax for quasi-linear in leisure preferences are studied. With utilitarian or maxi-min objectives, closed-form solutions are obtained. Bunching occurs over intervals where the second-order incentive condition is binding. Whether this occurs depends solely on the skill distribution. The patterns of consumption and tax rates in the nonbunched range are independent of whether the second-order incentive constraints are binding. Bunching at the bottom can also occur if a non-negative constraint on incomes is binding for some households. The pattern of marginal tax rates depends on the skill distribution and whether it is truncated.     

Competition and the cost of health care

Previous studies of the underreporting of income for tax purposes have used private employees as the benchmark to which other groups’ compliance was measured. In this paper it is suggested that there are a number of circumstances when there will be an incentive for private employees and their employers to collude to understate employee wages and salaries for purposes of taxation. The existence of high marginal tax rates of income tax combined with high social security payroll taxes are the typical conditions that stimulate this behaviour. These conditions are present in North Cyprus. This paper examines a rich source of household consumption expenditure and income data for North Cyprus that allows one to separate out the consumption expenditures made by the self-employed, private employees and civil servants over specific periods of time. From the comparison of consumption expenditures on food by these three groups it is possible to estimate how much self-employed and the private employees understated their incomes as compared to the civil servants. It is found that in North Cyprus private employees understate their incomes by approximately the same proportion of their incomes as do the self-employed.     

Cyclicality of markups and real wages in Korea

This paper examines the cyclical patterns of markups, real wages, and labor share for Korean industries. Markup ratio is greater than 1 in most industries. Markups are countercyclical, and real wages and labor share are procyclical. Income distribution effect has more impact on determining markups than price and technology effect.     

The London Business School econometric model of the UK

This paper describes the London Business School econometric model — the first fully computerized model of the UK — which has been used for regular public forecasting since 1966. The model, estimated on quarterly data, is organized around the income expenditure accounts with a fully integrated flow of funds sector which ensures consistency between portfolio decisions and income, savings and investment decisions. Aggregate demand is built up from its individual components so that demand influences are important for the short- and medium-term behaviour of the model. But there are important supply-side effects which work through the real exchange rate and real wages. Monetary conditions have a powerfull effect on the model through the exchange rate, personal sector wealth and interest rates. Wages and employment are determined in a labour market in which employment decisions depend on the level of demand and real wages while real wages depend on the level of unemployment, real benefits and direct and indirect taxes as well as underlying trends in productivity. Asset prices move in any period to clear both the spot and the future market in assets so that current asset prices in the equity, gilt-edged and foreign exchange markets reflect all current information about the expected state of the economy. In contrast, goods prices adjust sluggishly. The combination of continuously clearing asset markets and sluggish wages and prices gives the model many of the theoretical characteristics associated with the open-economy models of Dornbusch and Buiter and Miller.