Product markets and industry‐specific training

We develop a product market theory to explain why firms provide their workers with skills that are also useful to their competitors. Firms first decide whether to invest in industry‐specific training, then make wage offers for each others’ trained employees and finally engage in imperfect product market competition. Equilibria with and without training can emerge. If competition is soft, firms invest in training if others do. Thereby, they avoid having to pay high wages for trained workers. Furthermore, we draw welfare conclusions from the analysis. Finally, we discuss how our ideas apply to supplier relationships and to general training.     

Can a Shorter Workweek Induce Higher Employment? Mandatory Reductions in the Workweek and Employment Subsidies

This paper presents a unified model of the impact on employment of a mandatory reduction in work hours in combination with an employment subsidy to reduce quasi-fixed costs of employment, while attempting to maintain worker's take-home pay or welfare level. Achieving the dual policy objectives of enhancing employment and maintaining worker income is not necessarily feasible. Nevertheless, a reduction in the legal workweek may induce a degree of downward wage flexibility, while an employment subsidy to firms accommodates downward wage rigidity. It may be possible, therefore, to increase employment with a policy that combines a reduction in the workweek with an employment subsidy. In general, however, the long run employment outcome is ambiguous, and a decline in output cannot be ruled out. More direct policy measures whose impact can be assessed with greater certainty—in particular, removing structural rigidities in the labor market—should be given priority to decrease long term unemployment.     

Migration and Social Replacement Incomes: How to Protect Low-Income Workers in the Industrialized Countries Against the Forces of Globalization and Market Integration

This paper discusses how an industrialized country could defend the living standard of its unskilled workers against the wage competition from immigrants. It shows that fixing social replacement incomes implies migration into unemployment. Defending wages with replacement incomes brings about first order efficiency losses that approximate the budget cost of the government. By contrast, wage subsidies involve much smaller welfare losses. While the exclusion of migrants from a national wage replacement program does not avoid the distortions in labor migration, the (temporary) exclusion of migrants from a national wage subsidy program makes it possible to reach the first best migration pattern despite the preservation of the welfare state.JEL Code: F15, F22, I38, H5, J61     

The New Deal for Young People Five Years On*

The New Deal for Young People is the major welfare‐to‐work programme in the UK. It is a mandatory multistage policy targeted at 18‐ to 24‐year‐old unemployed people. This paper investigates the long‐term effectiveness of the programme in terms of enhancing the (re‐)employment probability of participating men. It exploits the eligibility rule to identify a suitable counterfactual relying upon a simple regression discontinuity design. The combination of job‐search assistance, training, wage subsidies and job experience enhances employability by about 4.6 per cent and this effect lasts over different cohorts.     

Industrial Sickness, Primary and Secondary: The Effects of Exit Constraints on Industrial Performance

In an attempt to protect workers from unemployment, governmentsin some countries subsidize firms which would otherwise fail.This article examines the effects of such subsidies on output,prices, and welfare. It also briefly reviews the effects forvarying price elasticities of supply and demand, for nontradedand fully traded goods, and for firms in which wages exceedtheir free market level. If the firm produces a nontraded good,the "sickness" of one firm that is subsidized to maintain productioncan spread to other firms that would be viable in the absenceof the subsidies. The analysis shows that the exit constraintshave the most detrimental effect when the elasticity of demandis low and supply elasticity is high, and when the governmentweighs the welfare of the firm's workers and consumers lessthan that of the general taxpayers and the firm owners. Whenlabor costs are higher than their free market levels and outputis thus less than the optimal levels, the subsidies could havean effect similar to that of an optimal production subsidy.In practice, however, this possibility is likely to be outweighedby associated rent-seeking costs and other distortions.     

Did the National Minimum Wage Affect UK Prices?*

One potential channel through which the effects of the minimum wage could be directed is that firms that employ minimum‐wage workers could have passed on any higher labour costs resulting from the minimum wage in the form of higher prices. This study looks at the effects of the minimum wage on the prices of UK goods and services by comparing prices of goods and services produced by industries in which UK minimum‐wage workers make up a substantial share of total costs with prices of goods and services that make less use of minimum‐wage labour. Using sectoral‐level price data matched to Labour Force Survey data on the share of minimum‐wage workers in each sector, it is hard to find much evidence of significant price changes in the months that correspond immediately to the uprating of the national minimum wage. However, over the longer term, prices in several minimum‐wage sectors – notably, take‐away food, canteen meals, hotel services and domestic services – do appear to have risen significantly faster than prices in non‐minimum‐wage sectors. These effects were particularly significant in the four years immediately after the introduction of the minimum wage.     

最低工资与企业创新

本文考察了最低工资对企业创新的影响。研究发现,最低工资显著促进了企业创新,通过相邻样本分析、双重差分策略以及其他一系列稳健性检验发现,结论基本稳健。最低工资改善了企业的物质资本,降低了低技能工人就业,提高了高技能工人就业,促进了企业人力资本优化,从而为企业创新提供了硬件和软件条件。企业实现创新的方式有自创和引进技术两种,最低工资提高了企业的创新效率。进一步研究发现,最低工资改善了企业的要素结构和全要素生产率。异质性分析发现,最低工资对劳动密集型企业、平均工资较低的企业、行业竞争激烈的企业以及高市场化地区企业的创新影响更加明显。本文的研究结果表明,最低工资政策具有促进企业创新升级的作用,这与党的十九届五中全会提出的“坚持创新驱动发展”的战略目标相一致。     

最低工资与企业创新

本文考察了最低工资对企业创新的影响。研究发现,最低工资显著促进了企业创新,通过相邻样本分析、双重差分策略以及其他一系列稳健性检验发现,结论基本稳健。最低工资改善了企业的物质资本,降低了低技能工人就业,提高了高技能工人就业,促进了企业人力资本优化,从而为企业创新提供了硬件和软件条件。企业实现创新的方式有自创和引进技术两种,最低工资提高了企业的创新效率。进一步研究发现,最低工资改善了企业的要素结构和全要素生产率。异质性分析发现,最低工资对劳动密集型企业、平均工资较低的企业、行业竞争激烈的企业以及高市场化地区企业的创新影响更加明显。本文的研究结果表明,最低工资政策具有促进企业创新升级的作用,这与党的十九届五中全会提出的“坚持创新驱动发展”的战略目标相一致。     

Taxation and skills investment in frictional labor markets

This paper examines the effects of wage taxation and corporate income taxation on training investment in frictional labor markets. Because of labor market frictions, the wage structure is compressed and workers do not capture the entire return from their skills. As a result, both firms and workers have incentives to support part of the costs of training investments. The analysis shows that when decisions to invest in training are made by firms and workers acting cooperatively, a wage tax increases the level of investment in skills whereas a corporate income tax decreases it. In this case, the introduction of a small wage tax unambiguously increases efficiency. The effects of both types of taxes on training are reversed when investment decisions are taken by firms alone. In any case, a corporate income tax is not neutral with respect to decisions to invest in skills even if the full cost of investment is deducted from taxable income in the period when it is incurred and the tax system provides full loss offset.     

Trend inflation, wage and price rigidities, and productivity growth

What are the steady-state implications of inflation in a general-equilibrium model with real per capita output growth and staggered nominal price and wage contracts? Surprisingly, a benchmark calibration implies an optimal inflation rate of -1.9 percent. The analysis also shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth. Steady-state output and welfare losses are quantitatively important even for low values of trend inflation. Further, nominal wage contracting is found to be quantitatively more important than nominal price contracting in generating the results. This conclusion does not arise from price dispersion per se, but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers. Finally, accounting for productivity growth is found to be important for calculating the welfare costs of inflation. Indeed, the presence of 2 percent productivity growth increases the welfare costs of inflation in the benchmark specification by a factor of four relative to the no-growth case.     

Real Wage Rigidities and the New Keynesian Model

Most central banks perceive a trade‐off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade‐off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare‐relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the divine coincidence, is due to a special feature of the model: the absence of nontrivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade‐off between stabilizing inflation and stabilizing the welfare‐relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation–unemployment relation found in the data.     

How Do Nominal and Real Rigidities Interact? A Tale of the Second Best

This paper analyzes the importance of real wage rigidities, in particular through their interaction with price stickiness, in a New Keynesian model. Real wage rigidities result from a combination of staggered wage setting and partial indexation of nonreset wages to past inflation. Blanchard and Galí (2007) show real rigidities to introduce a trade‐off between stabilizing inflation and the welfare‐relevant output gap. The present paper complements their findings by showing that the welfare costs of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best,” we also show that in the presence of real wage rigidities, higher price stickiness can be welfare enhancing.     

Welfare Cost of Fluctuations When Labor Market Search Interacts with Financial Frictions

We study the welfare costs of business cycles in a search and matching model with financial frictions. The model replicates the volatility on labor and financial markets. Business cycle costs are sizable. Indeed, the interactions between labor market and financial frictions magnify the impact of shocks via (i) a credit multiplier effect and (ii) an endogenous wage rigidity inherent to financial frictions. In addition, in a nonlinear framework, large welfare costs of fluctuations are explained by the high average unemployment and the low job finding rates with respect to their deterministic steady‐state values.     

Profit sharing (with workers) facilitates collusion (among firms)

We show how profit sharing by firms with workers facilitates collusion among firms in a dynamic oligopoly environment with uncertain demand. We first show that firm profits can always be increased by tying wages to market conditions. The optimal agreement takes the form of an option and features partial sharing because increased sharing raises the expected price‐wage differential, but reduces price‐wage variability. We then show that given any cartel, there exist market conditions such that simply giving some expected profit to workers raises expected firm profits via the transfer's impact on the incentive to cheat on the cartel.     

Labor tax reform, unemployment, and search

A key obstacle to reducing payroll taxes in many industrialized and transition countries is the direct revenue loss to the government that it implies. This paper studies a simple and practical labor tax reform of reducing a payroll tax and increasing a progressive wage tax that keeps the marginal tax wedge unchanged. Such a strategy increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations. Moreover, welfare rises if workers’ bargaining power is sufficiently large to exceed a critical value determined by the second-best Hosios condition.      

An Analysis of the Effect of Tax Policy on Health Insurance Purchases by Risk Group

There is an extensive body of literature dealing with the welfare loss associated with generous levels of health insurance as a function of the tax subsidy. The theoretical discussion in this study considers the effect of the tax subsidy on pooling within plans, and suggests the hypotheses that the tax subsidy will have a disproportionately positive effect on the likelihood that a high‐risk worker will be eligible for and participate in employment‐based coverage, while the effect of the tax subsidy on plan generosity will be greatest for low‐risk employees. If coverage of high‐risk individuals enhances social welfare, this result may offset, at least in part, the welfare loss associated with generous plans. Data from the 1987 National Medical Expenditure Survey are used to test these hypotheses. The results provide evidence that the subsidy works to expand risk pools in the employment‐based health insurance market.     

The Passthrough of Labor Costs to Price Inflation

We use a time‐varying parameter/stochastic volatility VAR framework to assess how the passthrough of labor costs to price inflation has evolved over time in U.S. data. We find little evidence that independent movements in labor costs have had a material effect on price inflation in recent years, even for compensation measures where some degree of passthrough to prices still appears to be present. Our results cast doubt on explanations of recent inflation behavior that appeal to such mechanisms as downward nominal wage rigidity or a differential contribution of long‐term and short‐term unemployed workers to wage and price pressures.     

Insurance and opportunities: A welfare analysis of labor market risk

Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, this paper provides an analytical characterization of three welfare effects: (a) the welfare effect of a rise in wage dispersion, (b) the welfare gain from completing markets, and (c) the welfare effect from eliminating risk. The analysis reveals an important trade-off for these welfare calculations. On the one hand, higher wage uncertainty increases the cost associated with missing insurance markets. On the other hand, greater wage dispersion presents opportunities to raise aggregate productivity by concentrating market work among more productive workers. Welfare effects can be expressed in terms of the underlying parameters defining preferences and wage risk or, alternatively, in terms of changes in observable second moments of the joint distribution over individual wages, consumption and hours.     

Comparing in‐work benefits and the reward to work for families with children in the US and the UK

The income transfer systems for low‐income families in the US and the UK try both to reduce poverty and to encourage work. In‐work benefits are a key part of both countries' strategies through the earned income tax credit and the working families' tax credit (and predecessors) respectively. But tax credits are only one part of the whole tax and welfare system. In‐work benefits, taxes and welfare benefits combine in both countries to provide good financial incentives for lone parents to do minimum‐wage work, but poorer incentives to increase earnings further. But direct comparisons of budget constraints hide important points of detail. First, not enough is known about what determines take‐up of in‐work benefits. Second, the considerable differences in assessment and payment mechanisms and frequency between EITC and WFTC mean that low‐income families in the US and the UK may respond very differently to apparently similar financial incentives.     

Natural concentration in industrial research collaboration

Empirical work shows that networks of research and development alliances are asymmetric, with a small number of firms involved in the majority of partnerships. This article investigates the welfare‐relevant effects of such concentrated networks in a model of network formation in an oligopolistic market. We find that concentration is a typical characteristic of a socially efficient network when the costs of collaborative activity are significant. Moreover, expanding on prior work relating to strategically stable interfirm networks, we compare the stable and the efficient structures. Our findings suggest that real‐world networks might even exhibit too little concentration.