The productivity-wage and productivity-employment nexus: a panel data analysis of Indian manufacturing

This article investigates the long-run relationship between labour productivity and employment, and between labour productivity and real wages in the case of the Indian manufacturing sector. The panel data set consists of 17 two-digit manufacturing industries for the period 1973–1974 to 1999–2001. We find that productivity-wages and productivity-employment are panel cointegrated for all industries. We find that both employment and real wages exert a positive effect on labour productivity. We argue that flexible labour market has a significant influence on manufacturing productivity, employment and real wages in the case of Indian manufacturing.     

Non-linear adjustment of real wages,employment and output in the UK

We employ the Brock, Dechert and Scheinkman statistic to investigate non-linearity in conditional mean in UK real wages, employment and output, and to fit threshould regression models to the series. The latter porvide reasonable representations for thenon-lineraity in real wages and output but the residuals from the threshold autoregressive model for employment still contain a non-linear component. In a forecast comparison the TAR models performed better than simple autoregressions. Using the lagged share of wages as an error-correction term we find evidence that all three series respond asymmetrically to lagged changes in wage share and other variables. Fore-casts of real wages and employment derived from these models were superior to those derived from standard, symmetric, ECMs.     

A simple test of the theory of the short-run Phillips curve

The theory of the Phillips curve is reexamined taking into account the relationship between workers and firms. Emphasis is given to the firm's role in determining employment and hours over the business cycle. Empirical relations between real wages, employment and unemployment using distributed lag estimation are examined.     

Wages and productivity: the role of labour market institutions in OECD countries

In the context of a monetary union, to keep a territorial equilibrium in terms of economic activity and employment, the relationship between real wages and productivity is crucial. In this paper, empirical evidence about the response of wages to productivity is obtained for 20 OECD countries and the role of labour market institutions to explain differences in this response is analysed.     

Involuntary unemployment,macroeconomic policy,and a behavioral model of the firm: Why high real wages need not cause high unemployment

The perspective of modern macroeconomic theory, be it new classical or old and new Keynesian, is that unemployment can be reduced only if real wages are cut. The modern Keynesians, basing themselves upon the microfoundations of efficiency wage theory, argue that real wages cannot and will not be cut by firms for efficiency wage reasons. This generates involuntary unemployment based on a market coordination problem. A behavioral model that contrasts with efficiency wage theory is presented here which suggests that reducing real wages need not affect the marginal cost of labor and, therefore, the number of individuals employed. In the behavioral model, wherein there exists some linearity in the relationship between real wages and working conditions and labor productivity, a lower real wage rate is not a necessary condition for reducing the unemployment rate nor is a higher real wage an obstacle to reducing it. In this scenario, unemployment, to the extent that it is demand-side induced, is not related to movements in real wages. Therefore, restoring full employment after a negative demand shock becomes a matter for demand management, not demand management that must be coordinated with measures designed to reduce real wages.     

Inflation Rate Variability and the Phillips Curve

This paper studies the relationship between inflation and unemployment by focusing on the effect of inflation rate uncertainty on real wages, employment and output. The effect of inflation on employment is shown to depend on the relationship between the mean rate of inflation and the variability of its forecasts. This can explain why the Phillips curve is negatively slopped in some periods and undetermined or positively slopped in others.     

TAXATION AND CENTRALISED WAGE SETTING: THE CASE OF ENDOGENOUS LABOUR SUPPLY

The implications of centralised wage setting for the relationship between taxation, wages and employment are studied allowing for endogenous adjustment in work hours. We show that centralisation promotes wage moderation, makes wages and employment less sensitive to changes in wage taxation and reduces the hours worked. With an individual supply of working hours, a wage tax can even improve employment if wage setting is centralised and marginal utility from a public good is sufficiently high. Moreover, if a profit tax is used to finance public expenditure, higher tax reduces wages and improves employment.     

Working time, employment, and work sharing: Evidence from Sweden

We study three questions which are important for work sharing to increase employment. First, is there a negative long-run relation between working time and employment? Second, are hours per worker exogenous with respect to wages and employment? Third, can policy makers influence actual hours per worker? We formulate a theoretical model for employment, hours per worker, production, and real wages. A VAR model with cointegrating constraints is estimated by maximum likelihood using Swedish private sector data 1970:1–1990:4. We find (i) no long-run relation between hours per worker and employment, (ii) that hours per worker are endogenous with respect to the estimation of long-run parameters, and (iii) that legislated working time and hours per worker are related to each other in the long run. First version received: September 1997/final version accepted: June 1999     

Gift Exchange and the Business Cycle: The Fair Wage Strikes Back

We extend the benchmark real business cycle model amending technology for fair wage considerations. Effort depends on current, alternative, and past wages. Past wages are treated as the worker's past wages (personal norm) or as the past wages of the society (social norm). This last model reproduces the high variability of employment, the low variability of wages, and the low wage–employment correlation without requiring a second source of impulsions. Wages and employment dynamics are adequately captured when norms adjust slowly to the environment. Fair wages are thus useful to solve the business cycle puzzle when we allow for intertemporal wage comparisons. Journal of Economic Literature Classification Number: E24     

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.     

Involuntary unemployment and inventories: An exploratory model of equilibrium and pure competition

We build up a model where the combination of labor supervision costs and non-uniform tastes results in a perfect-foresight equilibrium with positive involuntary unemployment and inventories even when prices and wages are assumed to be perfectly flexible. We show that the model could explain a positive association between the real wage and the level of employment (contrary to the standard post-Keynesian model), and a negative one between inventories and employment.     

Real earnings and business cycles: new evidence

In the time domain, the observed cyclical behavior of the real wage hides a range of economic influences that give rise to cycles of differing lengths and strengths. This may serve to produce a distorted picture of wage cyclicality. Here, we employ frequency domain methods that allow us to assess the relative contribution of cyclical frequency bands on real wage earnings. Earnings are decomposed into standard and overtime components. We also distinguish between consumption and production wages. Frequency domain analysis is carried out in relation to wages alone and to wages in relation to output and employment cycles. Our univariate analysis suggests that, in general, the dominant cycle followed by output, employment, real consumer and producer wages and their components is 5–7 years. Consistent with previous findings reported in the macro-level literature, our bi-variate results show that the various measures of the wage are generally not linked to the employment cycle. However, and in sharp contrast with previous macro-level studies we find strong procyclical links between the consumer wage and its overtime components and the output cycle, especially at the 5–7 years frequency.

Observed real wages are not constant over the cycle, but neither do they exhibit consistent pro- or counter-cyclical movements. This suggests that any attempt to assign systematic real wage movements a central role in an explanation of business cycles is doomed to failure. (lucas 1977)

     

Fair wages in a New Keynesian model of the business cycle

We build a New Keynesian model of the business cycle with sticky prices and real wage rigidities motivated by efficiency wages of the gift exchange variety. Compared to a standard sticky price model, our Fair Wage model provides an explanation for structural unemployment and generates more plausible labor market dynamics—notably accounting for the low correlation between wages and employment. The fair wage induced real wage rigidity also significantly reduces the elasticity of marginal cost with respect to output. The smoother dynamics of real marginal cost increase both amplification and persistence of output responses to monetary shocks, thus remedying the well-known lack of internal propagation of standard sticky price models. We take these improvements as a strong endorsement of the addition of real wage rigidities to nominal price rigidities and conclude that the fair wage extension of this paper constitutes a promising platform for an enriched New Keynesian synthesis.     

Is there a Laffer curve between aggregate output and public sector employment?

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is “small” and negative, when it is “large”. Using the annual data from 22 OECD countries over the period 1960–1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output. First version received: October 1996/Final version received: April 2000     

The Effect of Changes in Real Exchange Rates on Employment: Evidence from Manufacturing Industries in China, 1980–2002

This paper analyzes the effect of changes in real exchange rate on manufacturing employment. Our theoretical model predicts the positive effect of depreciation of real exchange rate on employment through a firm’s expectation on changes in real exchange rate and the interaction between real exchange rate and a firm’s import and domestic input. Using China’s manufacturing data during the 1980–2003 period, we find that depreciation of real exchange rate promotes employment growth in manufacturing industries, while change in real exchange rate is not a significant factor in promoting wage growth. We also find that an increase in export share offsets partially the effects of real exchange rate on employment and real wages. Translated from Journal of World Economy, 2005, (4): (in Chinese)     

Are US macroeconomic series difference stationary or trend-break stationary?

This article tests for the presence of a unit-root in all time series included in the extended Nelson–Plosser data set using the statistics devised by Zivot and Andrews, Perron and Murray and Zivot. It specifies the mixed model characterization of the trend-break stationary alternative that allows for a simultaneous break in both the intercept and slope of the trend-function. It rejects the unit-root null hypothesis for real GNP, nominal GNP, real per capita GNP, industrial production, employment, GNP deflator, nominal wages, interest rate and common stock prices. Use of appropriate critical values to assess the significance of the trend-function coefficients reveals that the slope-break should be included in real GNP, nominal GNP, real per capita GNP, nominal wages, interest rate and common stock prices. The results indicate that there is less evidence against the unit-root hypothesis with the extended Nelson–Plosser data compared to the original Nelson–Plosser data.     

Tenure, business cycle and the wage-setting process

We analyze the interaction between job tenure and external labor market conditions in wage determination. First, we introduce a model that combines job matching with business-cycle effects. As the employment relationship progresses, the worker appropriates a portion of the value of the match-specific human capital she accumulates, gradually becoming shielded from the cyclical variations in external labor market conditions: the employment relationship is progressively “internalized”. Then, we present empirical evidence supporting this prediction: the elasticity of wages to the unemployment rate decreases with tenure. This finding is robust to different specifications that allow for job heterogeneity, and it contributes to the interpretation of recent evidence of changes in the effect of the business cycle on wages.     

Effects of collective minimum wages on youth employment in Austria

This paper analyzes the impact of collective minimum wages on youth employment for 14 sectors of the Austrian economy, taking into account the possibility of nonlinearity. We find that when the real index of minimum wage rises above a certain point, negative employment effects for young individuals (aged between 19 and 25 years) can be expected in Austria. In five of seven market sectors the minimum wage lies above the optimal level that maximizes the employment of young workers.     

Some evidence on the membership hysteresis hypothesis in Europe

In a democratic model of union wage-setting, monopoly unions can induce hysteresis in the behavior of employment, at least locally. As a result, autoregressive representations of employment and membership should contain a unit root even if the determinants of labor demand are stationary. In addition, the model predicts that employment should Granger-cause consumption wages. These implications are tested with data from several European countries. Although there is little conclusive evidence that employment hysteresis constitutes the key difference between the European and US experiences, trade union membership data from the Federal Republic of Germany provides strong support for the membership hysteresis hypothesis in this country.     

Explanations of the demand for labour in the United Kingdom engineering sector

This paper presents a set of employment functions for nine individual engineering industries using annual data for the period 1954–1987 for the United Kingdom. A brief review alternative theoretical specifications is undertaken. A set of co-integrating regressions is computed to establish the existence of a long-run equilibrium relationship between employment and inter aliaoutput and real wages. Based on the results of the co-integration exercise, full unrestricted dynamic equations are obtained and these are then reduced to a more parsimonious representation. The finally preferred restricted models are then tested against a number of diagnostic statistical criteria to establish their robust and efficient properties. The value of these equations for explaining past and predicting future employment and training in the engineering sector is assessed.