Wage,productivity and unemployment: microeconomics theory and macroeconomics data

We confront microeconomics theory with macroeconomics data. Unemployment results from two main micro-level decisions of workers and firms. Most of the efficiency wage and bargaining theories predict that over the business cycle, unemployment falls below its natural rate when the worker’s real wage exceeds the reservation wage. However, these theories have weak empirical support. Firm’s decision predicts that when the worker’s real wage exceeds the marginal product of labour (MPL), unemployment increases above its natural rate. Accounting for this microeconomic decision helps explain almost all the fluctuations of US unemployment.     

Self-Enforcing Labour Contracts and Macroeconomic Dynamics

To properly account for the dynamics of the key macroeconomic variables, researchers incorporate various internal propagation mechanisms in their models. In general, these mechanisms implicitly rely on the assumption of a perfect equality between the real wage and the marginal product of labour. This paper features a micro-founded model of a limited-commitment firm, and derive endogenous dynamic labour contracts that produce a different linkage between the real wage and the marginal product of labour. The risk-sharing between the entrepreneur and the worker, both faced with enforcement problems, provides a different type of propagation mechanism. I investigate the dynamic properties of this endogenous rigidity in relation to the initial bargaining power of each agent.      

Market Rigidities and Labour Market Flexibility: An International Comparison

The effects of product and labour market rigidities on labour market dynamics are analysed using a panel of two-digit ISIC level data for seven OECD countries. As expected, employment protection was found to slacken labour market flows. Centralized wage bargaining also reduced the degree of job turnover, although a priori the effect of centralized wage bargaining on labour market flexibility is not clear. Industry subsidies have a positive impact on job reallocation by increasing job creation. The labour market dynamics are also compared in detail for two economies regarded as extremes in terms of regulations, the U.S. and Norway.     

Shocks and rigidities as determinants of CEE labour markets’ performance

In this article, the impact of real wage, productivity, labour demand and supply shocks on eight Central and Eastern European (CEE) economies from 1996–2007 is analysed with a panel structural vector error correction model. A set of long‐run restrictions derived from the dynamic stochastic general equilibrium (DSGE) model is used to identify structural shocks, and fluctuations in foreign demand are controlled for. We find that the propagation of shocks on CEE labour markets resembles that found for OECD countries. Labour demand shocks emerge as the main determinant of employment and unemployment variability in the short‐to‐medium run, but wage rigidities were equally important for observed labour market performance, especially in Poland, Czech Republic and Lithuania. We associate these rigidities with collective bargaining, minimum wage, active labour market policies and employment protection legislation.     

Collective bargaining and regional wage differences in Spain: an empirical analysis

This article analyses the importance of labour market institutions and, in particular, collective wage bargaining in shaping regional wage differences in the Spanish labour market. Using microdata from the Spanish Structure of Earnings Survey, our results reveal that there are significant inter-regional wage differences for similarly skilled workers. These differences are present throughout the whole wage structure and can be explained by both competitive and non-competitive factors, such as insufficient competition in product markets. In this context, industry-level collective bargaining plays a major role in accounting for regional wage differences, a role that in the Spanish case is enhanced due to its unusual regional dimension.     

Prices,Productivity and Wage Bargaining in Open Economies*

According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product‐market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product‐market conditions together determine wages. A wage equation is derived and estimated on aggregate data for four Nordic countries. Wages are found to depend not only on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.     

Marx Inside the Circuit: Discipline device,wage bargaining and unemployment in a sequential monetary economy

The aim of this paper is to show that Marxian labour theory of value can be consistently interpreted in terms of the monetary circuit model, where firms need initial finance to start production and where the money supply is endogenous. In contrast to the recently revived Marxian monetary models, in particular the New Interpretation, it is argued here that although the money wage is bargained for on the labour market, the real wage is determined by firms' choices, since firms autonomously determine the structure of production and hence real consumption for the working class as a whole. This does not mean that firms are able to set the real wage without economic and social constraints. Starting from our circuitist reading of the labour theory of value and distribution, a model is developed in order to determine the level of employment and income distribution, on the assumptions that (i) the industrial reserve army affects wage bargaining and labour effort and that (ii) workers react to the failure of their expectations on the real wage by reducing their work intensity. In this context, it is shown that firms may increase their share of profits over time only be means of innovations.     

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.     

Industry-Level Wage Bargaining: A Partial Rehabilitation—The German Experience

In order to reduce unemployment, it is often recommended that industry-level wage bargaining in Germany should be replaced by a more decentralized system. This paper provides a critical assessment of the current wage bargaining institutions and re-examines the case for a more decentralized system. Based on a theoretical model integrating Insider–Outsider aspects into the comparison, the uniformly superior employment performance of a decentralized wage bargaining system is questioned. We conclude that, rather than solely trying to decentralize wage bargaining, a promising policy option may be to improve the skills of the unemployed by efficient labour market policies and to foster institutional reforms such that wage bargaining takes account of the long-run employment consequences of wage setting.     

ENVIRONMENTAL POLICY AND LABOUR MARKET IMPERFECTION

This paper will set up a general equilibrium model with a distorted labour market to explore the effects of an environmental tax and union bargaining power on formal employment and the informal competitive wage. We find that when the government raises the environmental tax, both formal employment and informal competitive wage would fall. In addition, we confirm that a policy of labour market reform would increase both formal employment and the informal competitive wage.     

Monitoring Wage Developments in EMU

The purpose of this paper is to provide a brief review of aggregatewage developments in the EU member states. We start with a short discussion of wage bargaining mechanisms, their impact on labour market outcomes, and take a look into the crystal ball to learn about possible future developments. Section III analyses nominal wage developments focussing, in particular, on the evolution of cross-country patterns as anindicator for the synchronisation of wage developments. Section IV discusses real wage growth in relation to productivity developments using a somewhat refined 'real wage gap indicator';and Section V simply concludes.     

Labor taxation, public finance, and wage determination: evidence from OECD countries

This paper analyzes the relationship between unemployment, average effective labour tax rates and public spending in 17 OECD countries. The focus is on the degree of centralization and cooperation in wage setting. Estimation results from a dynamic time-series-cross-section model suggest that the countries where wage setting takes place at the firm level have used labour taxes less extensively in financing welfare spending, compared to countries with centralized or decentralized bargaining. This is consistent with another finding, according to which labour taxes distort the labour demand the least in the countries with firm level bargaining.     

The relation between the speed of demand saturation and the dynamism of the labour market

The purpose of this paper is to examine the medium run effect of the speed of demand saturation on the dynamism of the labour market which involves factors such as the growth of employment and real wage rate, using a computer simulation of the stochastically multi-sectoral pure labour model with a logistic demand function. From the simulation, we obtain the evolutions of the expectation of the employment rate and the real wage rate, supposing three cases where the speed of demand saturation for a product that stochastically emerges is, ceteris paribus, different. As a result, it is demonstrated that the faster growth of demand for a product that emerges stochastically accelerates the growth of employment, but decelerates the growth of real wage rate. The result depends on the heterogeneity of the agents, which is neglected by mainstream economics.     

The impact of taxes on female labour supply

There is little agreement in economics on the factors influencing labour supply and hence on the impact of taxes. Within the marginal model, real wages and incomes are directing people's labour market behaviour independent of time and space, whereas the human resources approach takes account of the social environment and past behaviour. Even if strong assumptions are made, the neoclassical theory cannot predict the outcome of a wage increase. The labour supply response depends on the relative strengths of the substitution and the income effect. Since nonparticipation in the labour market is explained by a reservation wage being higher than the market wage, this is the only situation in which neoclassical theory would predict a rise in labour force participation with a wage increase. This case occured in a ‘natural experiment’ in Sweden. The Swedish tax system changed in 1971 from joint to separate taxation of spouses resulting in a substantial increase in the net wage of married women. This article investigates the impact of the change in the Swedish tax system on female labour force participation, concluding that it cannot explain the substantial rise in the participation rates of Swedish women. This is a significant result, questioning standard neoclassical theory and supporting the more institutional views of human labour market behaviour. That is that time and space as well as the social environment are important when analyzing labour supply. This will have consequences for international comparisons. Only factors which explain developments within one country might be relevant for explaining international differences, e.g. in labour force participation.     

Optimal tax progressivity in unionised labour markets: What are the driving forces?

In labour markets with collective wage bargaining higher progressivity of the labour income tax creates a trade-off. On the one hand, wages are lowered and unemployment decreases, on the other hand, the individual labour supply decision is distorted at the hours-of-work margin. The optimal level of tax progressivity within this trade-off is determined using a numerical general equilibrium model with imperfect competition on the goods market, collective wage bargaining and a labour-supply module calibrated to empirically plausible elasticity values. The model is calibrated to macroeconomic and institutional parameters of both the OECD average and a number of individual OECD countries. In most cases the optimal degree of tax progressivity is below the actual level. A decomposition approach shows that the optimal level is increased by high unemployment and by the general tax level.     

UNION–FIRM BARGAINING AGENDA REVISITED: WHEN UNIONS HAVE DISTINCT PREFERENCES

In this paper we revisit the issue of the scope of bargaining between firms and unions by considering a more general union's utility function with distinct preferences and sequential negotiations. First, we compare exogenously given labour market institutions; i.e., right‐to‐manage (RTM) and sequential efficient bargaining (SEB). We show that the conventional wisdom, which states that firms always prefer RTM, no longer holds. In fact, when unions are adequately wage aggressive and have strong enough bargaining power, firms may prefer SEB negotiations; however, firms switch their preference to RTM when unions are very strong. Moreover, we show that a conflict of interest between the parties may emerge when unions are sufficiently employment oriented as well as sufficiently wage aggressive and not too strong or too weak in bargaining. Second, we analyse the endogenous choice of the bargaining agenda. We show that a rich plethora of equilibria may occur and new situations of conflict/agreement of interests between the bargaining parties arise in particular when unions are sufficiently wage‐aggressive.     

Wage Determination In Australia*

This paper examines whether a stable expectations-augmented Phillips curve exists for Australia. High real wages in the face of continuing high unemployment over the past decade have led to suggestions that the level of unemployment has little effect on wage determination, with the bargaining process taking place between employers and those employees in ‘secure employment’. Results from aggregate data suggest that the level of unemployment is relevant to wage determination. In addition, the impact of overtime on the growth in money wages is consistent with the view that those in secure employment are influenced by labour market conditions.     

Labour mobility during transitionEvidence from Georgia1

This article deals with labour mobility in Georgia during economic transition. We use quarterly 1998–99 panel data to examine mobility across six labour market statuses (inactivity, unemployment, formal wage employment, informal wage employment, self‐employment and farming). Our findings are consistent with the hypothesis of labour market segmentation. Formal employment is preferred to informal employment. Unemployment is largely a queuing device for individuals with higher education waiting for formal jobs. Some self‐employment is subsistence activities and consistent with a segmented labour market, while other is high risk and potentially high return activities. Age, gender and education are significant determinants of labour mobility. Finally, informal employment serves as a buffer in times of recession – with farming and informal wage employment absorbing labour shed by other statuses during the Russian financial crisis.     

Demand and supply effects of bargaining power shocks

In times of crisis, social partners may consider a temporary decline in wages as a necessity to maintain employment. This paper studies the opposing demand and supply effects following declining bargaining power of workers in a New-Keynesian model with search and matching in the labour market. Lower labour income reduces aggregate demand in the presence of credit-constrained consumers. The main result is that falling bargaining power contracts output notably when monetary policy is constrained by the zero lower bound or when agents' expectations about the persistence of the shock adjust slowly.     

Optimal Factor Income Taxation in the Presence of Unemployment

According to conventional wisdom internationally mobile capital should not be taxed or should be taxed at a lower rate than labour. An important underlying assumption behind this view is that there are no market imperfections, in particular that labour markets clear competitively. At least for Europe, which has been suffering from high unemployment for a long time, this assumption does not seem appropriate. This paper studies the optimal factor taxation in the presence of unemployment which results from the union-firm wage bargaining both with optimal and restricted profit taxation when capital is internationally mobile and labour immobile. In setting tax rates the government is assumed to behave as a Stackelberg leader towards the private sector playing a Nash game. The main conclusion is that in the presence of unemployment, the conventional wisdom turns on its head; capital should generally be taxed at a higher rate than labour.