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.     

Corporate labour share of income and the shadow economy: a cross-country analysis

This article addresses a link between the size of the shadow economy and the corporate labour share of income in the European Union. Fixed individual and time effects models suggest that there is a negative link between these two indicators. The coefficients are statistically significant if we control for other variables related to labour markets, such as unemployment rates or strictness of employment protection (regular contracts). Depending on the exact model specification, our estimates suggest that an increase in the shadow economy by 1% of GDP results in a 0.5–1% decline in the labour share of income in the corporate sector.     

A New Keynesian IS curve for Australia: is it forward looking or backward looking?

This article estimates the forward looking, backward looking and an extended version of the New Keynesian IS curve for Australia. The validity of these models is investigated by imposing the constraint on real rate of interest as well as when the constraint is relaxed. Two measures of output gap, namely GAP1 (constructed using the unobserved components approach) and GAP2 (constructed using a quadratic trend) are utilized. Our results suggest that the baseline backward looking and forward looking models are overwhelmingly rejected by the data. This evidence strongly supports the extended backward looking model (with GAP2) being relevant for monetary policy analysis.     

Financial development and instability: The role of the labour share

This paper examines the role of the labour share in creating instability in a small open economy. We assume that financial markets are imperfect so that entrepreneurs are credit constrained, and that this constraint is tighter for low levels of financial development. Aghion, Bacchetta and Banerjee [Aghion, P., Bacchetta, P., Banerjee, A., 2004. Financial development and the instability of open economies. Journal of Monetary Economics 51, 1077–1106] have shown that as the degree of financial development increases, output rises but instability appears for intermediate levels of financial development. Crucially, they assume that labour is paid before production takes place, and hence crises are solely due to the increased cost of debt repayment as firms accumulate capital. We show that under the more reasonable assumption that wages are paid at the end of the period, changes in the labour share also play a role in eroding profitability. Our analysis also predicts that financial crises are associated with substantial movements in the sharing of value added between capital and labour.     

An empirical test of the Post-Keynesian growth model applied to functional income distribution and the growth regime in Brazil

The main purpose of this paper is to empirically investigate whether, between 1970 and 2008, the Brazilian economy was profit-led or wage-led. To this end, we approach a canonical post-Keynesian growth model (PKGM) to estimate certain vector autoregressive (VAR) models and perform Granger non-causality tests. Three main results are extracted from the generalized impulse-response functions provided by the VAR models. First, a positive profit-share innovation affects economic growth and capacity utilization rate, both in the same direction, suggesting a profit-led pattern. Second, a profit share shock positively affects both the ratio actual/potential output, and capital accumulation, reinforcing the previous result. Third, a capacity utilization shock is shown to positively affect both output growth and capital accumulation via the accelerator effect. On the one hand, the pairwise Granger non-causality test does not provide any evidence of causality running from profit share to economic growth or capacity utilization. On the other hand, there is some evidence of Granger causality running from profit share to capital accumulation.     

The labour income share and the relative price of investment in the US: an empirical investigation

Several studies argue that the recent decline in the secular trend of the labour income share is mostly driven by capital-embodied technological progress which is typically identified with trend reductions in the relative price of investment. In this paper, I use data from the United States to assess the nature of the relationship between trends in the labour share and the relative price of investment. Results from co-integration tests reveal that the share and the relative price of investment are most likely not co-integrated. However, co-variation tests indicate that both time series share a common stochastic component, and additional tests of structural breaks point at the presence of a common change in the mean or trend of both series. These results suggest that capital-embodied or investment-specific technological progress may have played an important role in the decline of the secular trend of the labour share.     

The Beveridge curve and labour market dynamics in Turkey

This article investigates the dynamics of unemployment and vacancy rates in Turkey during the period 1951 to 2008 by means of a Beveridge Curve (BC). The time-series analysis of unemployment and vacancies as well as two other relevant labour market variables, real wages and real labour productivity, strongly suggests inefficiency in the Turkish labour market. A stable long-run relationship between unemployment rate and vacancy rate is found for Turkey, that is, the existence of a negatively sloped BC is verified. The estimated Turkish BC reflects the structural problems and lack of flexibility in the labour market. The modified BC with real wages and labour productivity reveals that labour productivity has no significant effect on unemployment rate whereas wages have positive and significant effects on the same variable.     

Beveridge's analysis of unemployment in 1909: the reserve of labour

Abstract

The aim of this paper is to provide a rational reconstruction of Beveridge's theory of unemployment published in 1909. First and foremost, it shows that his theory of unemployment is coherent – what Beveridge refers to as ‘the reserve of labour’ represents ‘unemployment’ as a whole; unemployment is due to the imperfection of the labour market and associated friction and the organisation of the labour market is necessary. Second, it suggests that as early as 1909, a negative relationship already existed between unemployment and job vacancies and that the segmentation of the labour market and imperfect information are key factors of friction. The first part of the paper provides a reconstruction of Beveridge's theory of the reserve of labour (1909) including causes and factors of unemployment and unemployment policies. The second part shows that certain founding principles of the ‘Beveridge curve’ (Beveridge 1944 Beveridge, W. H. 1944 [1953]. Full Employment in a Free Society, London: George Allen and Unwin.  [Google Scholar] [1953]) were already to be found in his 1909 book and that links can be established between Beveridge (1909 Beveridge, W. H. 1909. Unemployment: A Problem of Industry, London: Longmans, Green and Co.  [Google Scholar]), Phelps (1970 Phelps, E. S. 1970. The new microeconomic in inflation and employment theory. The American Economic Review, 59(2): 147–60. [Web of Science ®] , [Google Scholar]) and Pissarides (2000 Pissarides, C. A. 2000. Equilibrium Unemployment Theory, Cambridge, MA: MIT Press.  [Google Scholar]).     

New forms of labour contract and labour flexibility in Russia

This paper assesses the claims that employment in the new Russian private sector relies heavily on informal and unregistered labour agreements and that the violation of existing labour law by new private employers is driven by their need for more flexible working arrangements.
The paper shows that these claims are unsupported on every count. The new private sector does not rely heavily on informal or illegal forms of employment and there is no evidence that it uses labour more flexibly, in any of the usual senses of the term, than the traditional sectors of the economy. The conclusion is that there is no economic justification for the systematic violation of the existing labour legislation. It is suggested, therefore, that enforcement of the existing law is a precondition for its effective reform in those areas in which it might be a barrier to restructuring.     

Inflation dynamics in open economies: Empirical evidence for G7 countries on the role of import prices and the cost channel

The supply side effects of both the nominal interest rate (i.e., the cost channel) and import prices on inflation are very important for the design of monetary policy. However, the empirical identification of the cost channel (traditionally associated with the advance payment of wages) has ignored import prices. We start by deducting a New Keynesian Phillips Curve (NKPC) which shows that ignoring import prices in the estimation of the cost channel may lead to incorrect results. Taking this into account, we study the empirical relevance of the cost channel and import prices using the NKPC for the G7 countries. We test whether the estimation of the cost channel is affected when the price of imported inputs is considered; if it is relevant to extend the cost channel given that imports of final consumption goods are also paid in advance; if imports should be treated as inputs and/or consumption goods, and if there is an immediate or slow exchange rate pass-through. Empirical results indicate that the cost channel is present in imported consumption goods in particular, and import prices play an important role in explaining inflation dynamics.     

Macro frictions and theoretical identification of the New Keynesian Phillips curve

I discuss theoretical identification of the New Keynesian Phillips curve, and show that it can be identified with limited information techniques when the data generating process is a New Keynesian model with enough macro frictions or persistent shocks. Monte Carlo experiments illustrate the quantitative relevance of the results.     

The role of labour demand elasticities in tax incidence analysis with heterogeneous labour

Whether labour bears full burden of household level income and consumption taxes ultimately depends on the degree of substitutability among different types of labour in production. We find more variation in incidence patterns across households with less than perfectly substitutable heterogeneous labour than with perfectly substitutable homogeneous labour in production. This finding is based on results obtained from homogeneous and heterogeneous labour general equilibrium tax models calibrated to decile level income and consumption distribution data of UK households for the year 1994. We use labour supply elasticities implied by the substitution elasticity in households' utility functions and derive labour demand elasticities from the substitution elasticity in the production function. First version received: March 1998/Final version received: April 1999     

The New Keynesian business cycle achievements and challenges

The New-Keynesian (NK) business cycle model has presented itself as a potential “workhorse” model for business cycle analysis. This paper seeks to assess afresh the performance of the baseline NK model and its various extensions. The main theme of the paper is that although the dynamic NK literature has secured a robust defence to criticism arising, inter alia, on account of lack of microfoundations, it still has a long way to go in terms of providing a fully satisfactory model of the business cycle. In this regard, it is conjectured that explicitly accounting for the role of heterogeneity in business-cycle dynamics could lead towards a viable solution.

The role of the wage-productivity gap in economic activity

This paper argues that wages lagging behind productivity is a long-run structural phenomenon due to the interplay of wage dynamics and productivity growth. We call this interplay frictional growth, a term that can only be nullified in the utopian case of zero growth and/or no dynamics. In that vein, we challenge the prevailing view of the neutrality of the labour income share and investigate its impact on the evolution of employment. We thus estimate wage setting and labour demand equation systems – for France, Germany, Italy, Japan, Spain, the UK, and the US over the 1960–2008 period – and find that the labour share is negatively associated with employment even when the conventional assumption of a unitary long-run elasticity of wages with respect to productivity holds. Acknowledging the presence of the wage-productivity gap in both the short and long run, this work stands as the building block for assessing the effect of the falling labour share on economic activity. As recent work has shown that the widening wage gap is also an important factor prompting inequality, it can be argued that by supporting employment the falling labour share ‘sweetens’ the impact of rising income inequality, and, as such, deserves the attention of policy makers.     

The minimum wage and the Lithuanian labour market

This paper presents a comprehensive and non‐standard labour market analysis based on univariate and multivariate models for wages. The novelty of this paper lies in the use of non‐normalized cointegrating vectors for labour market analysis. Wages are the basis of labour market models, as well as the key factor for employees and employers; therefore, the central analytical axis is a classical wage bargaining process, where one side requires and the other side proposes a certain level of wages. Analysis is divided into two parts: foremost, a careful analysis of Lithuanian wages is conducted and a univariate model for the investigation of interactions between the minimum wage and the rest of the wages is proposed; only after the minimum wage model is drafted can the multivarate model for the whole economy be built up. Briefly, the methodology used in this article can be annotated as a synthesis of sequential theoretical and empirical considerations that combine the results of theoretical macroeconomics with data‐generating patterns and stylized facts. The model is considered as the final one only if macro‐theory preconditions, statistical prerequisites, and stylized real‐world requirements are met and fulfilled. In addition, this article gives an example and a quantitatively, as well as qualitatively, motivated suggestion as to how to incorporate minimum wages into econometric models and puts forward an explanation for why it is necessary to include minimum wage dynamics into labour market analysis. The article is nothing but an empirical case study that demonstrates how many minor details have to be taken into account until a realistic labour market model is built up. Although the paper deals with the labour market, the suitable application of time series methods is the main subject of the analysis.     

The determinants of female labour supply in Hungary

The aim of this paper is to closely examine the effect on a married woman's labour supply decision of non-labour income and of her own wage rate in a transition economy. The paper first shows that labour force participation rates for Hungarian females, though decreasing, were still extremely high and comparable to male economic activity in western countries. It then estimates labour supply parameters using a model that controls for sample selection issues associated with the labour supply of married women. Wage elasticity is estimated to be high and positive (1.81) while the income effect is consistent with leisure being a normal good. No sample selection bias is found.     

The division of labour and market structure

Most firms produce most of the time under conditions of substantial economies of scale. The division of labour, according to Adam Smith the mainspring of wealth, is intrinsically an economies of scale phenomenon. Market structure in most industries in characterized by a small number of suppliers and a larger number of customers. I explain this law of small numbers as the equilibrium of two forces: the deconcentration effect of imitation and the market spliting effect of further refinements in the division of labour by innovation. A deconcentrated market creates larger incentives for market splitting (product differentiation) by innovation than a concentrated market. But market splitting raises concentration in the market and it raises the number of different markets in the economy. Before the economies of scale of old products are fully exploited, new products are being offered which again are produced under conditions of economies of scale.     

A Phillips curve interpretation of error-correction models of the wage and price dynamics

This paper presents a model of employment, distribution andinflation in which a modern error correction specification ofthe nominal wage and price dynamics (referring to claims onincome by workers and firms) occupies a prominent role. It isbrought out, explicitly, how this rather typical error-correctionsetting, which actually seems to capture the wage and pricedynamics of many large-scale econometric models quite well,is fully compatible with the notion of an old-fashioned Phillipscurve with finite slope. It is shown how the steady-state impactof various shocks to the model can be profitably conceived ofand interpreted in terms of (and to some extent even calculatedby means of) this long-run Phillips curve.     

The working poor and the working of American labour markets

This paper examines the connection between working poor householdsand industrial restructuring in the US as a whole and threeMidwest manufacturing cities. It question the conventional laboureconomics argument that a main reason for the substantial risein low-wage jobs in the US is 'skills mismatch'. This followsfrom the basic contention that people are paid what they areworth in an unrestricted economy. However, labour market segmentationtheory poses a broader range of factors as determinants of labourmarket outcomes, including industrial structure and the bargainingpower of individuals and groups of workers relative to employers.The paper first examines the nature and extent of globalisation,i.e., the transition from manufacturing to service and retailsectors, and a major consequence, growing income inequality.Government data are used to provide measures of deindustrialisationand income inequality. Government data are used to provide measuresof deindustrialisation and income inequality. It then reportson findings from a four-year study of the working poor in SouthBend, Indiana, one of the three cities studied in the firstpart. Evidence presented in the paper supports segmentationthinking and indicates that other factors beyond individualresources influence labour market outcomes, which are outsidethe control of workers, especially the working poor.     

Capital account openness and the labour share of income

This paper investigates the relationship between capital accountopenness and the share of labour in national income. Employinga new index of financial openness and a cross-country panelof labour shares available from the United Nations System ofNational Accounts, the author shows a robust negative correlationbetween the degree of openness and the labour share. Althoughthis effect is not present for low income countries, the directnegative relationship holds for all other subsamples and inthe presence of a variety of controls. A plausible explanationis that openness alters the conditions of bargaining betweenlabour and capital. By increasing the bargaining strength ofcapital vis-a-vis labour, increased capital mobility raisesrents accruing to capital. Thus, capital account openness mayreduce labour's share of income in the firm, and thereby, atan economy-wide level, its share of national output.