Strategic Innovation with Complete and Incomplete Labour Market Contracts

In a model of strategic R&D competition between two firms that negotiate with independent unions we show that: (i) incomplete labour market contracts may Pareto-dominate complete labour market contracts (ii) even when complete contracts Pareto-dominate incomplete contracts, economies can get stuck in the incomplete contract equilibrium. These conclusions provide additional strategic reasons why complete labour market contracts may not be used—even if they were feasible. We propose two testable predictions to discriminate between complete and incomplete contracts: (i) the variance of wages is lower with complete contracts; (ii) the variance of employment is higher under complete contracts.     

Financial Market Imperfections, Labour Market Imperfections and Business Cycles

A Greenwald–Stiglitz (1993a) style rational expectations business cycle model is introduced in which uncorrelated productivity shocks or monetary shocks generate autocorrelated employment fluctuations due to financial constraints. The propagation mechanism is carefully modelled: because of capital market imperfections (only standard debt contracts are traded), firms' labour demand changes in response to changes in their balance-sheet position; because of labour market imperfections (efficiency wages), employment and unemployment fluctuate in response to shifts in labour demand. The virtue of the model is its simplicity. Despite the fact that unemployment is endogenous, the dynamic behaviour of the model under rational expectations can be characterised analytically.
JEL classification : E 32     

SHORT-TERM CONTRACTS REGULATIONS AND DYNAMIC LABOUR DEMAND: THEORY AND EVIDENCE

We present a dynamic labour demand model where we evaluate the impact of employment regulations on permanent and temporary employment. We consider three different kinds of regulations, namely firing costs, hiring costs and a constraint on temporary contracts. These regulations differently affect the size and composition of employment. The theoretical results are interpreted and questioned on the basis of empirical evidence on the employment effects of the regulation reforms that occurred in the major European countries in the period 1983–1999. The empirical analysis is based on a new set of time‐varying indicators on permanent employment protection, fixed‐term contracts and temporary agency work regulations. We find evidence in support of the hypothesis that fixed‐term contracts have been effective stepping‐stones to permanent jobs during the period under observation. On the contrary, flexible temporary agency work regulations seem to induce a substitution of permanent with temporary contracts.     

Employment security and the demand for labour in Europe

This paper analyses the impact of employment security on labour demand. The approach taken is to estimate a dynamic labour demand function that allows for the effect of changes in a measure of employment security derived from surveys of employers. The estimation uses panel data on employment (both in terms of the total number of employees and total hours worked) for seven European countries for the period 1981–1994. The results suggest that employment security can have significant effects in slowing down the dynamic adjustment of labour demand. The paper also finds some (less robust) evidence that employment security can increase the long run level of labour demand in terms of total hours, but not the number of persons employed.     

Does Price Stability Exacerbate Labour Market Rigidities in the EMU?

How will the commitment to price stability affect labour market rigidities in the European Monetary Union? I explore a model where firms choose between fixed wage contracts (where the employer cannot lay off the worker, and the wage can only be changed by mutual consent), or contracts where employment is at will, so that either party may terminate employment (with strong similarities to temporary jobs). A fixed wage contract provides better incentives for investment and training, while employment at will facilitates efficient mobility. Inflation erodes the real value of a fixed contract wage over time, and badly matched workers are more likely to quit for other jobs. Disinflation has opposing effects on labour market rigidity: fixed wage contracts become more rigid in real terms, but fewer firms will choose fixed wage contracts.     

The Effects of Employment Insecurity on Demand,Productivity and Employment Levels

This paper investigates the effects of labour market deregulation on demand, productivity and employment levels in the short term. The focus will be on deregulation of labour contracts, i.e. on the transition from a legal system that guarantees permanent employment to a system of formal rules allowing for job insecurity. The idea is that the greater the deregulation of labour contracts, the higher the productivity and the lower the demand and employment levels.     

Employment in family managed firms: Less but safe? Analysing labour demand of German family managed firms with a treatment model for panel data

This paper analyses the differences in labour demand between family and non-family managed firms. These firms seem to have better employment performance than non-family controlled companies. Therefore, this study applies a treatment model for panel data controlling for endogeneities of being a family managed firm or not. The results of the estimations indicate that labour demand is possibly larger because of family members joining the firms as extra employees. Moreover, labour turnover is lower, supporting the assumption that family firms offer some kind of implicit labour contracts. However, in opposite to previous results, it seems that only small family managed firms show different employment behaviour.     

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.     

Is labour becoming more or less flexible? Changing dynamic behaviour and asymmetries of labour input in US manufacturing

Have employment and hours become more flexible over time? Vectorauto-regressions are estimated using monthly time-series datato generate impulse responses, which reflect the dynamic responseof employment and average hours of labour input following agiven shock in output demand. A marked change in the US manufacturingsector occurred after 1979. Although there is heterogeneityby industry and asymmetry over the business cycle, hours havebecome somewhat more and employment considerably less flexible,particularly during expansion phases. Employers are apparentlydelaying hiring and relying more on using hours as a bufferto absorb fluctuations in output demand.     

Dynamic labor contracts with temporary layoffs and permanent separations

Summary. We study the implications of optimal dynamic contracts in private information environments for fluctuations in effort and employment across time and productivity states. To this end, we incorporate temporary layoffs and permanent separations as well as on-the-job effort variations into a dynamic model of moral hazard. We consider two different “commitment” environments. In a “full commitment” environment, although the firm can temporarily lay a worker off, neither party can dissolve the contractual relationship once it has been initiated. On the other hand, in a “limited commitment” environment, both parties can dissolve the relationship at the beginning of any period in order to pursue an outside option. We use our model to study the implications of optimal contracts for incentives, employment histories, layoffs and separations across full information, full commitment and limited commitment settings. We compute solutions to the relevant principal-agent problems, endogenously determining the set of states in which separations occur and the domain of the firm's value function, as well as the value function itself. Received: February 28, 2000; revised version: January 21, 2001     

Political change and informality

This paper examines informality during the political and economic turmoil that accompanied the Arab Spring revolution in Egypt. The paper focuses on unprotected employment and the extent to which it changed by educational level immediately after the January Uprising of 2011. We find that over time and particularly after the revolution, informal employment has increased for both high‐ and low‐educated workers, albeit through different paths: high‐educated workers were more likely to be stuck in informality, while low‐educated formal workers were more likely to lose their contracts. The increase in informal employment in the wake of the Arab Spring is more pronounced for the high‐educated. The results suggest a high level of rigidity in the Egyptian labour market, even in the wake of the Arab Spring.     

AGGREGATE EMPLOYMENT DYNAMICS AND (PARTIAL) LABOUR MARKET REFORMS

European labour markets have undergone several important innovations over the last three decades. Most countries have reformed their labour markets since the mid‐1990s, with the liberalization of fixed‐term contracts and temporary work agencies being the common elements to such reforms. This paper investigates the existence of a change in the dynamic behaviour of the aggregate employment for major European Union countries – France, Germany, Italy and Spain. According to our results, partial labour market reforms have made the response of the aggregate employment to output shocks larger and quite comparable to that found for the UK – the most flexible labour market in Europe since the Thatcher reforms.     

A DYNAMIC MODEL OF TOURISM, EMPLOYMENT AND WELFARE: THE CASE OF HONG KONG

Abstract.  The present paper uses a dynamic open-economy model with wage indexation to examine the impact of tourism on employment and welfare. Both short-run and long-run situations are analysed. It is well known that tourism converts non-traded goods into tradable goods. An increase in the demand for a non-traded good raises its relative price, which results in an expansion of the non-traded sector at the expense of the traded goods sector. This output shift raises labour employment in the short run. However, in the long run, the higher relative price leads to higher wages, resulting in a negative impact on labour employment. If the output effect is dominant, the expansion in tourism raises employment and welfare. However, under realistic conditions tourism may lower both labour employment and welfare due to rising costs. These results are demonstrated by simulating a dynamic model for the case of Hong Kong.     

Layoffs,wages and unemployment insurance

The influence of unemployment insurance on wage and layoff behavior is analyzed in the context of optimal labor contracts. Responses of contract terms to changes in economic parameters are shown to depend in general on the nature of the initial contract, the degree of workers' risk aversion, and the resolution of bargaining conflict. Layoffs are not necessarily reduced by an increase in experience rating or a reduction in the UI benefit. Product demand fluctuations tend to induce procyclical employment fluctuations but not wage fluctuation. An implication of optimal contracts with private insurance suggests a reason for government intervention in UI provision.     

Domestic Jobs and Foreign Wages

It is plausible that the labour demand decisions of multinational corporations (MNCs) depend not only on domestic, but also on foreign labour costs. This hypothesis is tested by estimating labour demand equations for a sample of Swedish MNCs. Indeed, higher foreign costs increase an MNC's Swedish employment and reduce its foreign employment. As MNCs become more important in many OECD countries, the responsiveness of domestic output and employment to foreign labour costs is likely to increase.     

Job Protection versus Contracts At‐Will: Trading‐Off Entrenchment and Shirking

I compare two types of employment contracts: those offering job protection and at‐will contracts. Their respective performances reveal the following trade‐off: at‐will contracts provide cheaper incentives for agents not to shirk, but they can induce the opportunistic actions of agents to make themselves less dispensable (“entrenchment”). One implication of the model is that more senior managers, such as chief executive officers, should receive more protection, for example, through contracts that are explicitly not at‐will or contracts that specify a longer duration.     

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.     

Subsidised Training and Youth Employment: Distinguishing Unobserved Heterogeneity from State Dependence in Labour Market Histories

Using the 1990–2 wave of the French Labour Force Survey to study the employment histories of young people I consider transitions between six labour market states: employment contracts whether permanent or temporary, unemployment, training, education and non-participation. I use a fixed effect estimator in a dynamic multinomial logit model which can accommodate any form of unobserved heterogeneity in levels. This analysis can be extended to Markov processes of any order. I relate heterogeneity components to individual and family characteristics by using simulated maximum likelihood methods. These procedures allow evaluation of the effects training schemes have on youth employment histories.     

Recursive contracts,firm longevity,and rat races: An experimental analysis

This paper reports the results from a laboratory experiment which investigates the structure of contracts that emerge in overlapping-generation firms where future ownership is a perquisite of employment. Workers in the young generation are offered employment contracts designed by the firms' owners who belong to the old generation. When old, employed workers are granted ownership rights as long as the firm continues to operate. In line with theoretical predictions, the results indicate that as firm longevity increases, the recursive nature of the contracts leads to a rat race characterized by low wages, high effort levels, and rent dissipation. These results have important implications for the optimal management of long-lived firms such as partnerships.     

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.