Markov switching in disaggregate unemployment rates

We develop a dynamic factor model with Markov switching to examine secular and business cycle fluctuations in the U.S. unemployment rates. We extract the common dynamics amongst unemployment rates disaggregated for 7 age groups. The framework allows analysis of the contribution of demographic factors to secular changes in unemployment rates. In addition, it allows examination of the separate contribution of changes due to asymmetric business cycle fluctuations. We find strong evidence in favor of the common factor and of the switching between high and low unemployment rate regimes. We also find that demographic adjustments can account for a great deal of secular changes in the unemployment rates, particularly the abrupt increase in the 1970s and 1980s and the subsequent decrease in the last 18 years. First Version Received: December 2000/Final Version Received: June 2001     

HOW TO VALUE THE POORER PROSPECTS OF YOUTH IN THE EARLY 1990s?

Young workers in the 1990s can expect greater economic insecurity, as well as lower average earnings, compared to older workers, or compared to the youth of previous decades. The cost of greater insecurity depends upon an individual's probability of unemployment, marginal utility of income gains/losses and the extent to which individuals can smooth consumption over time by borrowing and drawing down assets. Since unemployment insurance cutbacks and higher unemployment have increased the risk exposure of youth, changes in the expected value of their income may understate utility losses as measured by the change in certainty equivalent income.
This paper uses a behavioural microsimulation model to compare the impacts of 1971 and 1994 unemployment insurance legislation and unemployment rates in Canada. It calculates both the expected value of income changes and, using a Stone-Geary utility function, the change in inequality of well-being (as measured by certainty equivalent income) for youth and for prime age workers. Both calculations reveal that youth were disproportionately affected by Canada's changing labour market environment. Very few youth have enough assets to finance consumption during spells of unemployment.     

Evolution of infant and child mortality in Chile: a model

The author contends that birth rate and infant and child mortality rates are jointly determined by demographic, economic, health care, and other influences. Working under this structural assumption, a multiequation model is developed, estimated, and simulated, in which real earnings, unemployment, midwife visits, access to cheap energy, public health expenditures, and degree of urbanization are determinant factors of declining infant and child mortality in Chile. Most notably, mortality declined during a period of increasing unemployment and falling living standards for at least part of the population. The study found all 3 rates to be jointly determined, but by different variables. Specifically, unemployment affected birth rate and child mortality rate, while declining infant mortality was based upon midwife visits, health expenditure, and access to cheap energy. At the policy level, trade-offs often result between infant and child mortality, especially where high birth rates prevail. Where movement along the Phillips curve is possible, higher earnings should be preferred over lower unemployment for the benefit of infant and child mortality. Preferred policy would week to provide a carefully balanced combination of better earnings and more midwife visits.     

Family Income and Wealth,Youth Unemployment and Active Labour Market Policies

This paper studies some features of unemployment in Italy using cross section individual micro data. Since unemployment is particularly harsh with respect to youths, interest is focused on 15-29-year-old youngsters. The analysis is carried out using standard logit models and the results show that personal and family characteristics play an essential role in shaping youth activity and unemployment rates of short and long duration, together with product market conditions and labour market features. In particular, the income effect seems relevant for participation decisions, while the family wealth helps in reducing youth unemployment. Various policy instruments might be able to reduce youth unemployment, especially if these instruments are targeted through means-testing on family income and wealth and through a proper distinction between the first job seekers and the strictly unemployed.     

Unemployment insurance: The role of electoral systems and regional labour markets

Levels of insurance against unemployment vary considerably across countries. Replacement rates, the ratio relating income from unemployment to what people earned when they were employed, are higher in countries with proportional electoral systems than in countries with majoritarian systems. Also, replacement rates are positively correlated with per capita income and negatively correlated with the countries' unemployment rates. I develop an electoral competition model that replicates these stylized facts.     

Trade,capital accumulation and structural unemployment: an empirical study of the Singapore economy

This paper studies the factors responsible for the secular decline of Singapore's unemployment rate over the period 1966-2000 in an environment of low and stable inflation rates. We introduce wage bargaining and unions into a specific-factors, two-sector economy with an export sector and a non-tradable sector to obtain an endogenous natural unemployment rate. Increases in the relative export price and capital stock in the export sector are predicted to reduce structural unemployment. These hypotheses could not be rejected based on structural estimations and co-integration regressions. Empirically, capital accumulation in the export sector explains most of the decline in Singapore's unemployment rate.     

Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis

The paper develops a static three sector competitive general equilibrium model of a small open economy in which skilled labor is mobile between a traded good sector and the non-traded good sector and unskilled labor is specific to another traded good sector. Capital is perfectly mobile among all these three sectors. We introduce involuntary unemployment equilibrium in both the labor markets and explain unemployment using efficiency wage hypothesis. We examine the effects of change in different factor endowments and prices of traded goods on the unemployment rates and on the skilled-unskilled relative wage. Also, we introduce Gini-Coefficient of wage income distribution as a measure of wage income inequality; and show that a comparative static effect may force the skilled-unskilled relative wage and the Gini-Coefficient of wage income distribution to move in opposite directions in the presence of unemployment.     

Unemployment dynamics with international capital mobility

We study the response of domestic unemployment rates to shocks in total factor productivity for economies with high capital mobility and low labour mobility. We show that high capital mobility amplifies the impact on the domestic unemployment rate of domestic fluctuations in total factor productivity, shortens the lag of the response to shocks and raises the variability of unemployment. But average unemployment is unaffected. Capital flows increase the riskiness of labour income and reduce the riskiness of capital income but do not reduce mean welfare.     

Welfare states and unemployment

Summary This paper studies equilibrium unemployment in a search model where the government both provides liberal unemployment insurance and taxes labor at high progressive tax rates. It is shown how progressive income taxation can counteract a high unemployment rate under generous unemployment insurance. In particular, high marginal taxes reduce workers' incentives to switch jobs in response to changing economic opportunities. This lower labor mobility reduces unemployment but at the cost of a less efficient labor allocation.We are grateful to William Dupor, Krishna Kumar, and Ashok Rai for excellent computer programming.     

Long-term unemployment and short-term unemployment benefits: The changing nature of non-employment subsidies in Central and Eastern Europe

Non-employment rates in all central and eastern European countries have increased dranatically thoroughout the transition and are currently larger than those of the lowest income OECD countries. Non-employment benefits other than unemployment benefits are providing income support to this growing number of able-bodied individuals out of work. Under the present design of unemployment benefits and social assistance, there may be serious incentive problems related to the shift from unemployment benefits to other, means-tested, non-employment benefits and this shift occurs in transition countries at rather early stages of an unemployment spell; these incentive problems are bound to become particularly acute in a less inflationary environment.     

Inflation,Unemployment and Hysteresis: An alternative view

This paper integrates ideas concerning the influence of the interest rate on the rate of profits with an analysis of inflation and its relation with unemployment. Inflation is regarded, as in Kaleckian contributions, as resulting from inconsistent claims on income, but the approach taken leads to different conclusions concerning the effects of inflation (or deflation) on income distribution, and the circumstances giving rise to acceleration of inflation. The approach followed in the paper also provides explanations of phenomena that have appeared 'puzzling', particularly the association of different unemployment rates with stable inflation, and the persistence of high rates of unemployment.     

How Many Jobs Must We Provide for a Balanced Postwar Economy

This study investigates how unemployment and income influence the length of time an individual remains in good health. This is a complex relationship since unemployment or low income deteriorates health but poor health can become a barrier to obtaining higher income or gaining re-employment. Data are from the British Household Panel Survey, using two measures of physical health: an index of mobility problems and a measure of self-assessed health. The results show that unemployment, low income and poor education adversely affect the time that people remain in good health. These results have important implications for public policy, particularly in an age of austerity when social protection mechanisms are under threat. In fact, the results suggest that to improve health and reduce health inequality, more investment needs to be directed at policies that enhance labour force participation, improve education and reduce income inequality.     

Transition from unemployment benefits to social assistance in seven European OECD countries

The topic of this paper is the transition from unemployment benefit schemes to social assistance in seven European OECD countries. The unemployment benefit schemes are formally quite different in the seven countries. Most are mandatory but Denmark and Sweden have voluntary unemployment insurance and Finland has a mandatory basic scheme with a voluntary income related component on top of that. Self employed people can join the U.B. schemes in the 3 Scandinavian countries. All the U.B. schemes have working or contribution conditions to be met by the members in order to obtain eligibility for benefits. These conditions are relatively tight in the Netherlands, France and Sweden and relatively easy in Denmark and Great Britain with Germany and Finland in between (based on rules in 1994–95). Recent developments in several countries have been to tighten the access conditions to the U.B. schemes and from 1997 Denmark will be ‘on line’ with Germany. The Netherlands have tightened the access criteria very significantly in 1995. There is a considerable variation as far as the duration of the unemployment benefit period is concerned. Sweden has a benefit period in fact without effective time limitations. The Danish benefit period is also very long, 7 years now being reduced to 5 years. 5 years is also the maximum duration in the Netherlands and in France, but only after many years of work and after a relatively high age has been reached. The maximum period in Germany, 22/3 years, also requires a long work history and a relatively high age. Finland and Great Britain have uniform benefit period (just as in Denmark and Sweden), in Finland it is appr. 2 years (longer for elderly unemployed just as in Sweden and Denmark) and in Great Britain it was 1 year but from October 1996 it was reduced to 1/2 year. The differences in the duration of the benefit periods between the seven countries are very considerable. As already mentioned, there has been a tendency to reduce the benefit period in several countries. Such a change is also being considered for the ‘never ending’ benefit period in the Swedish U.B. scheme. The benefit formula is purely flat rate in Great Britain and income related in the other countries. There is a maximum benefit level in 5 of these countries, but not in Finland, where the compensation is stepwise decreasing with increasing income. In the 5 countries with income related benefits and a maximum benefit level, this maximum level is reached at a relatively low income in Denmark (2/3 APW income) and Sweden (close to APW income) and at a relatively high income in the Netherlands (appr. 1.5 APW income) and Germany (appr. 1.7 APW income) and at a very high income level in France. France is the only country among the 7, where the benefits after an initial period are being reduced regularly (every 4 months) in the benefit period down to a minimum level. Sweden and Germany have reduced the benefit levels in recent years. Denmark has the highest gross compensation percentage, 90, in relation to lost income, but it is only effective over a relatively narrow income interval, from approx. 133,000 DKK to 162,000 DKK (1996), ‘between’ the min. and max. U.B. rates. According to the 3 institutional criteria applied here, access to the schemes, duration of the benefit period and the type of benefit formula, the U.B. schemes of the seven countries studied are very different. The exit scheme from U.B is social assistance in most of the countries, but not in Germany, where it is possible to continue in a scheme with lower compensation but still income related. For Sweden it is hardly meaningful to speak of an ‘exit scheme’ when the U.B. insurance is without effective time limitations. The exit schemes in the other countries are all characterized by having flat rate benefits. All the exit schemes are means tested and this is a crucial difference to the U.B. schemes, and they are without time limitations. Means testing and no effective time limitations are usual characteristics for social assistance and social assistance like schemes. In all the countries, except in Denmark and Sweden, there is ‘topping-up’ from social assistance to a guaranteed minimum level disregarding the income sources. In the two Scandinavian countries mentioned, a ‘social event’, i.e. illness or unemployment, is required in order to be eligible for social assistance benefits. Net replacement rates are used to illustrate the levels of compensation within the U.B. and the S.A. schemes, to identify possible incentives problems, and to illustrate the economic implications of the transition from U.B. to S.A. schemes. The net replacement rates presented are calculated by using the ‘disposable income after net housing costs’ income concept. The calculations include several family types, singles and couples with and without children and for the couples with one or two incomes. A general result but with some modifications, cf. the following, could be that the U.B. based replacement rates usually are higher than the S.A. based, but that the difference is minor when the U.B. scheme is flat rate or income related with a maximum benefit level being reached at a relatively low income, for Great Britain there are in several cases no difference at all. The ‘topping-up’ has the implication that the U.B. and S.A. based replacement rates are often identical at the lower end of the income scale. The very high S.A. based replacement rates (well over 100 per cent) often seen for Denmark and Sweden at low income levels do not necessarily imply, that social assistance in those two countries is more generous than in the other countries, it is very much an effect of not having more or less automatic ‘topping-up’ to a guaranteed minimum income level when earned income is low. The single parent family type seems to have incentives problems at relatively low income levels in most of the countries, especially when receiving U.B., she may temporarily be caught in the ‘unemployment trap’. The one earner couple with children may also be exposed to the ‘unemployment trap’ but on a more permanent basis. The S.A. based replacement rates for this family type are extraordinarily high (and higher than the U.B. based) in Denmark and Sweden, where this family type, however, is very rare. For the two earner family (where one of the spouses always has earned income) the means testing of S.A. makes an impact on the S.A. based net replacement rates, they are in most cases substantially lower than the U.B. based. The results of the net replacement calculations indicate no or only minor economic implications by a transition from U.B. to S.A. in the lower end of the income scale while the effect in most cases will be more substantial in the higher end of the income scale. This is not always the case in Sweden and Denmark where S.A. for some family types are preferable to U.B. and where the difference in other cases may be so small, that it implies incentives problems for joining the voluntary U.B. scheme. The calculation of ‘long term’ (5 years) net replacement rates for families at a low income level (the point in the income distribution where only 5 per cent have lower income) and only including one earner families, reveals that either the long benefit period in the U.B. scheme (Sweden and Denmark) or ‘topping-up’ (Germany, the Netherlands and Great Britain) generate ‘constant’ net replacement rates, and quite high ones, at low income levels. Only in France and to some extent in Finland will there be a decrease in net replacement rates over time. Most of the differences concerning the duration of unemployment benefit periods and to some extend the benefit formulas have no effect on the long term net replacement rates. At higher income levels the time limitations in the U.B. schemes will be visible again, except in Great Britain where the U.B. and S.A. benefits are almost identical. It is not possible to point out a ‘worst’ country with respect to ‘incentives’ problems, but the Danish, and to some degree also the Swedish, U.B. schemes with their high net replacement rates at lower income levels and long duration periods ‘stand’ out in many cases, and the S.A. schemes in those two countries may also contribute to permanent ‘unemployment traps’ as well as lack of incentives to join the voluntary insurance schemes. The two Scandinavian countries are, however, not alone with ‘incentives problems’. The section on long term net replacement rates showed that for low income levels the replacement rates were high and constant in most countries. This result is often due to ‘topping-up’ to a guaranteed minimum standard.     

The long-run determinants of fertility: one century of demographic change 1900–1999

We examine the long-run relationship between fertility, mortality, and income using panel cointegration techniques and the available data for the last century. Our main result is that mortality changes and growth of income contributed to the fertility transition. The fertility reduction triggered by falling mortality, however, is not enough to overcompensate the positive effect of falling mortality on population growth. This means that growth of income per capita is essential to explain the observed secular decline of population growth. These results are robust to alternative estimation methods, potential outliers, sample selection, different measures of mortality, the sample period, the inclusion of education as an explanatory variable, and the use of different data sets. In addition, our causality tests suggest that fertility changes are both cause and consequence of economic development.     

Does public‐sector employment fully crowd out private‐sector employment?

Employment matters for development because it can raise household income, lower inequality, promote economic growth, and contribute to political stability. Many countries have high rates of public employment, but what effect does this have on overall employment and unemployment rates? This paper investigates if and to what extent public‐sector employment crowds out (reduces) private‐sector employment. In particular, we estimate regressions of unemployment or private‐sector employment on two measures of public‐sector employment. The study uses an especially assembled dataset, which is novel for its coverage of a large sample of developing countries as part of a panel of rich and poor countries. Our results point to full or just about full crowding‐out for the entire sample. Unlike previous cross‐country studies, which were restricted to advanced economies, we are able to show that these results also apply to developing countries, although crowding‐out may not be quite as high as in advanced economies. The results mean that high rates of public employment have an offsetting large negative impact on private employment rates and do not reduce overall unemployment rates. With the qualifier that government activities may help the economy in other ways, our results imply that, rather than creating public‐sector jobs, scarce fiscal resources could be better spent on other developmental needs.     

Imported technologies,urban unemployment and the North-South dialogue

This paper extends the Harris-Todaro model with intersectoral capital mobility to include sector specific imported technologies. Technologies are assumed to be embodied in imported capital goods. The small economy in the South, for which the model is defined, can import any amount of these technologies from the North at given royalty rates. We find that if the North agrees to reduce the royalty rate on the industrial technology, both the level and the rate of urban unemployment would rise and the income distribution change against the wage earners, whereas such a reduction for the agricultural technology would have just the opposite effects. A decrease in either royalty rate would increase the national income in the South, although the magnitude of the increase in income would be larger with reduced royalty rate for agricultural rather than industrial technology. The policy implication is that the South should emphasize the import of agricultural technology over the industrial technology.     

Optimal Redistributive Taxation in a Search Equilibrium Model

This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labour markets. Redistributive taxation distorts labour demand and wages. Compared to their efficient values, gross wages, unemployment, and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees-type setting.     

Estimating Income and Price Elasticities of Trade in a Cointegration Framework

This paper presents further evidence on the empirical regularity known as the "45-degree rule." Income and price elasticities of trade are estimated for 21 countries in a cointegration framework. More specifically, the autoregressive distributed lag (ARDL) modeling approach and the DOLS procedure are adopted to estimate the long-run structure. The empirical results confirm the existence of a systematic relationship between growth rates and income elasticity estimates: faster growing economies have high income elasticities of demand for their exports but lower import elasticities, which implies that faster growth can be observed without any marked secular trend in real exchange rates.     

Analysis of wage flexibility across the Euro Area: evidence from the process of convergence of the labour income share ratio

This article analyses wage flexibility as a factor in the unemployment rate across 12 Euro Area countries. We use extensive evidence pertaining to the countercyclical behaviour of the labour income share ratio to estimate its equilibrium value in the long run. This measure is calculated using a hybrid New Keynesian Phillips curve. Additionally, by using spatial econometrics, we can incorporate into the study the interdependence in the inflation among the countries. As a result, we identify countries that might see an improvement in their employment rates by improving their wage flexibility. We also identify countries with high unemployment that is not a consequence of a lack of wage flexibility.     

累进性劳动所得税、失业波动与内生稳定器——一个动态新凯恩斯主义的视角

将累进性劳动所得税引入NKMP—DSGE模型中考察失业波动与累进性税收的宏观效应。贝叶斯脉冲响应函数表明,外生冲击对于就业与失业具有不同的冲击效应,因而忽略失业可能引起结论的偏误;失业的贝叶斯冲击分解结果表明,货币政策冲击是推动我国失业波动最重要的力量,并且我国劳动力市场存在显在的“失业回滞”。进一步,通过模型比较发现,累进性劳动所得税具有内生稳定器的作用。在失业问题日益严峻的背景下,采用对劳动力市场做出反应的货币政策机制以降低失业,并使用内生稳定器缓和经济波动,将可能实现降低失业与缓和经济波动的双重效果。