Unemployment and Catching Up: Europe Vis-à-vis the USA

This paper develops a two-region two-sector endogenous growth model with a dual labour market based on efficiency wages. Growth is driven by research done in the (high-tech) tradeables sector. The follower region tends to catch up in terms of labour productivity with the leader region. Differences in unemployment compensation systems can lead to relative convergence, i.e., a steady state with the backward region lagging behind the leader region. The reason for this is that high social welfare compensations generate high unemployment and reduce the amount of labour employed for R&D purposes.     

The Contribution of Sectoral Productivity Differentials to Inflation in Greece

This paper estimates the magnitude of the Balassa-Samuelson effect for Greece. We calculate the effect directly, using sectoral national accounts data, which permits estimation of total factor productivity (TFP) growth in the tradeables and nontradeables sectors. Our results suggest that it is difficult to produce one estimate of the BS effect. Any particular estimate is contingent on the definition of the tradeables sector and the assumptions made about labour shares. Moreover, there is also evidence that the effect has been declining through time as Greek standards of living have caught up on those in the rest of the world and as the non-tradeables sector within Greece catches up with the tradeables.

Sectoral Wage Rigidities and Labour and Product Market Institutions in the Euro Area

We estimate wage Phillips curve relationships between sectoral wage growth, unemployment and productivity in a country-industry panel of euro area countries. We find that institutional rigidities – such as labour and product market institutions and regulations – limit the adjustment of euro area wages to unemployment, in both upturns and downturns, particularly in manufacturing and, to a lesser extent, in the construction and service sectors. In addition, there are further limitations in the response of wages to changes in unemployment during economic downturns which suggests that euro area wages are also characterised by significant downward wage rigidities, especially in the manufacturing sector. These results are robust to specifications that account for factors that may affect structural unemployment (such as duration-dependent unemployment effects), as well as changes in the skill composition of employment that may affect the evolution of aggregate wages. The results also hold for panels including or excluding the public sector (where wages may be determined differently to the private sector also due to the effects of fiscal consolidation on public sector wages during the crisis). From a policy perspective, reforms in product and labour markets which reduce wage rigidities can facilitate employment growth and enhance the rebalancing process in the euro area.     

Do NBFCs propagate real shocks?

Notwithstanding a smaller share of total loans vis-à-vis commercial banks, we investigate a possible role of Non-banking financial companies (NBFCs) in propagating a real shock to the rest of the economy. Our two-sector model captures emerging economy characteristics such as NBFC borrowings from commercial banks, heterogeneities in financial constraints, and labour market friction faced by firms. Our theoretical and simulation results, using Indian parameters, indicate that an idiosyncratic shock (i.e., higher realization of the failed firms) and a sectoral productivity shock (in the sector financed by NBFCs) increase the interest rate charged by the banks, and the unemployment rate while reducing the real wages and per capita capital formation. However, the reverse happens given a structural shock, assumed as an increase in the average number of failed firms. Early detection of such shocks and quick policy intervention are required to provide a cushion for capital formation and job creation.     

Labour Market Flexibility,Wages and Incomes in Sub‐Saharan Africa in the 1990s

Abstract: This paper provides an overview of how African labour markets have performed in the 1990s. It is argued that the failure of African labour markets to create good paying jobs has resulted in excess labour supply in the form of either open unemployment or a growing self‐employment sector. One explanation for this outcome is a lack of labour market ‘flexibility’ keeping formal sector wages above their equilibrium level and restricting job creation. We identify three attributes of labour market flexibility. First, whether real wages decline over time; secondly, the tendency for wages to adjust in the face of unemployment; and thirdly, the extent of wage differentials between sectors and/or firms of various size. Recent research shows that real wages in Africa during the 1990s may have been more downwardly flexible than previously thought and have been surprisingly responsive to unemployment rates, yet large wage differentials between formal and informal sector firms remain. This third sense of the term ‘inflexibility’ can explain a common factor across diverse African economies — the high income divide between those working in large firms and those not. Those working in the thriving self‐employment sector in Ghana have something in common with the unemployed in South Africa — both have very low income opportunities relative to those in large firms.     

Setting It Right: Employment Protection,Labour Reallocation and Productivity

This paper provides a critical review of the recent empirical evidence on the links between regulations affecting the hiring and firing of workers, labour reallocation and productivity growth. It also reviews how workers affected by labour mobility fare and discusses policy options to support them. The upshot is that stringent employment protection has a sizeable negative effect on labour market flows and, through this channel, hinders productivity growth. At the same time, the evidence also shows that while greater labour market reallocation benefits many workers through higher real wages and better careers, some displaced workers lose out via longer unemployment durations and/or lower real wages in post-displacement jobs. In this context, reforms of employment protection should be considered as part of a comprehensive package that also includes an adequate safety net for the unemployed and effective re-employment services.     

Institutional wage-setting,labour demand and labour supply: Causal estimates from a South African pseudo-panel

Unemployment in South Africa has multiple causes. This article uses a district pseudo-panel to estimate the elasticity of labour demand, labour supply and unemployment with respect to wages. We assess whether hiring decisions are more sensitive to increases in wages of low-paid workers than high-paid workers, and whether wage growth prompts entry into the labour market. These channels combine to result in the positive causal effect of wage growth on unemployment. The research investigates whether these effects are dominated by districts in which unionisation rates are high and employment is concentrated in large firms. Wage growth of middle-paid to highly paid workers – as opposed to low-paid workers – reduces local labour demand and raises local unemployment. Bargaining arrangements correspond closely to the spatial wage distribution; in turn, a large part of the impact that wage growth has on labour market outcomes is determined by these wage-setting institutions.     

Are House Prices Responsible for Unemployment Persistence?

The paper analyses the ambiguous role of house prices and housing investment for unemployment dynamics. Whereas traditional models see an increase in house prices as a dynamic multiplier that contributes positively to business cycle swings, the paper considers additional transmission mechanisms via the competitiveness channel (wages) and productivity. As house prices rise, wages tend to follow in order to make up for the loss in real disposable income, which limits employment creation. In addition, with rising house prices, the relative size of the construction sector – a low-productivity industry – tends to increase, lowering aggregate productivity growth, further dampening competitiveness. The paper estimates a stylised dynamic general equilibrium model with unemployment flows. Introducing different transmission mechanisms through which the housing market influences labour and macroeconomic dynamics, the size and direction of the housing market channel is being analysed. The estimation results show that housing shocks can have long-lasting negative effects on employment even though a housing boom can generate a short-lived stimulus on growth and employment. The paper also offers some policy advice simulating housing shocks under different types of structural reforms and macro-prudential regulation.     

Contribution of interest rate control to China’s economic development

China’s economy has grown at an unprecedented pace since 1978, which has resulted in a sustained improvement in the average living standard in China. A theoretical model is developed in the present study to analyze the role of interest rate control in China’s economic growth, where investment is primarily determined by interest rates available to firms and entrepreneurs. When the central bank regulates the interest rates and makes them below the equilibrium rate, high-level investment activities boost economic growth and introduce new technologies into the economy, which in turn promotes growth in labour productivity. As the current marginal product of capital is much higher than the interest rate, the output growth is much faster than consumption growth and exports become an important part of the economy. To maintain competitiveness of exports over a longer period, it is necessary to keep exchange rates low, which results in large foreign exchange reserves. When the export sector is losing its competitiveness edge due to increased labour costs and exports cannot digest the difference between output growth and consumption plus investment growth, interest rate control may lose its positive impact on economic growth.     

The changing fortunes of an aristocracy? Determinants of wages and conditions of employment in Kenya

This article examines the functioning of the labour market in the modern sector in Kenya and, in particular, considers the determinants of wages and other conditions of employment. An analysis of negotiated wages from collective agreements signed during 1974–75 suggests that measures of an ‘ability to pay’ characteristic of industries with limited competition in the product market and realizing above-average labour productivity are the best predictors of inter-industry wage differences. Locational and ownership variables are also found to be significant. Size of labour force is only significant for clerical wage rates. Four case studies suggest superior conditions of employment are positively associated with higher than average wages.     

The productivity–wage relationship in South Africa: an empirical investigation

This article investigates the relationship between labour productivity, average real wages and the unemployment rate in South Africa at the macroeconomic level, using time‐series econometric techniques. There is strong evidence of a structural break in 1990, after which time all three variables rose rapidly. The break appears to have negatively affected the level of employment in the first instance, and subsequently fed through into per worker wages and productivity. A long‐term equilibrium (cointegrating) relationship was found between real wages and productivity, but unemployment was apparently unconnected to the system, which lends support to the insider–outsider theory. A long‐term wage–productivity elasticity of 0,58 indicates that productivity has grown more rapidly than wages, which is consistent with the finding that labour's share of gross output has been shrinking over the past decade. These trends may be explained plausibly by the adoption of job‐shedding technology and capital intensification.     

The new Ricardian specific factor model

This paper explores the implications on trade and wage inequality of introducing financial capital or credit in the standard Ricardian model of production, where a given amount of start-up credit is used to employ sector specific skilled and unskilled workers following the Wage Fund approach of classical economists. Thus, we have the Specific Factor (SF) structure of Jones (1971) in a new Ricardian model (NRM) with credit and two types of labour. With an entirely different mechanism from the conventional Neo-Classical structure, distributional consequences of changes in endowments, commodity prices, and financial capital are established. Comparisons with Jones (1971) show that unlike SF model, credit expansion affects wages and nominal costs without affecting trade patterns, while rise in the relative price of the skill-intensive good causes skilled wage to hike less than proportionately, and may cause return to capital to inflate more than the wages. We extend the basic model to analyse immigration, unemployment and imperfect credit market.     

Inflation,wage bargaining,wage policy and production structure: Theory and empirical results for the Netherlands

Summary Starting from traditional neo-classical results, a theory is developed in which, in addition to prices, labour productivity and unemployment, the degree of unionization, the profit rate and the shifting-on of direct taxes and social security contributions influence nominal contract wages. A separate theoretical framework is constructed for wage drift.It is furthermore shown how the wage theory presented is related to Friedman-Phelps specifications. After a discussion of wage policy and its potential influence on wages, wage equations are estimated for the key bargaining sector as well as for wage followers. After their characteristics have been dealt with, as well as the effects of wage policy and the role of wage drift, the relationship between key bargaining, inflation and employment is analysed, showing that the model presented is able to explain stagflation.My thanks are due to Mr. H. von Eye for his help in carrying out the calculations and to Mr. A. de Reyger for providing me with the sectoral unionization rates and his general research assistance. Mr. A. J. van Geel kindly prepared the graphs.     

Minimum wage rates and unemployment in The Netherlands

Summary A static limited dependent variable model is formulated to analyse the Dutch labour market from an individual's viewpoint. Results suggest that high minimum labour costs are an important source of unemployment. Secondly, the reduced-form participation equation is replaced by a neoclassical labour supply equation. Thus, also the effect of high minimum wage rates on employment through labour supply is taken into account. Supply appears to be forward bending and participation is insensitive with respect to unemployment benefits. Simulations suggest that the effect of lowering the productivity threshold by reducing before-tax minimum wages dominates supply effects.The author wishes to thank Geert Joosten, Arie Kapteyn, Peter Kooreman, Bertrand Melenberg, Viji Narendranathan and Theo Nijman for helpful comments and the Netherlands Central Bureau of Statistics for providing the data. The views expressed in this paper do not necessarily reflect the policies of the CBS.     

The case of labour time reduction without wage compensation: More or less employment?

Summary In this paper a model of a closed economy, including a market sector and a public sector, is presented to analyse the consequences of a reduction of labour time with and without wage compensation. It turns out that a policy of labour time reduction without wage compensation is a very strong instrument to improve production and employment, if the economy is characterized by the Keynesiandemand model. But if the economy is characterized by the neoclassicalsupply model, a relatively large drop in wages is necessary to prevent a policy of labour time reduction from causing a process of stagflation.     

On the puzzling slowdown of wage and productivity growth in Taiwan: evidence from a comparison with South Korea

Since the early 2000s, the growth rate of real wages in Taiwan has been very low, even negative for high‐skilled workers. This paper sheds light on the potential causes of this puzzling development through a comparison of Taiwan's performance with that of South Korea. In many dimensions, most notably wages and labour productivity, both economies developed quite similarly between 1995 and 2001–02, but diverged thereafter. We relate the development of wages and labour productivity in the two economies to sectoral structural change and to sectoral differences in labour productivity growth, skills upgrading, and foreign trade.     

China’s expansion of higher education: The labour market consequences of a supply shock

In the decade 1998–2008 China expanded enrolment in higher education almost six-fold. For the examination of its short term labour market consequences, this unprecedentedly huge and sudden policy change might be regarded as a natural experiment. After providing a theoretical framework for analysis, the paper uses urban labour market surveys to analyse how the labour market adjusted to the supply shock. Three outcomes are examined: the effect of the expansion on wages, on unemployment, and on access to ‘good jobs’. The shock is found to reduce relative wages, raise the unemployment rate, and reduce the proportion in good jobs, but only for the entry-year or entry-period cohort of graduates. The effect is fairly powerful for entrants, especially university rather than college graduates, but incumbent graduates are largely protected from the supply shock. An attempt is made to examine the labour market effects of the quantitative expansion on educational quality. The paper provides insight into the operation of China's labour market in recent years.     

Productivity growth,fixed exchange rates,and export-led growth

This paper studies how the fixed exchange rate regime (FERR) may promote growth when a country experiences faster rates of productivity growth in its tradable sector than its nontradable sector. In a simple two-sector model with money, we show that the FERR can reduce the Balassa-Samuelson effect if wage adjustment is subject to nominal rigidities. The undervaluation thus created suppresses real wage growth but increases the size of the tradable sector and leads to higher growth rates of the entire economy. Using cross-country panel data, our econometric exercises provide robust evidence that supports the results. Meanwhile, other fundamentals, including the external balance position, export share in the tradable sector, and the stage of development, play roles in determining the effects of FERR. Last, we apply the empirical results to run simulations on China from 1994 to 2007 to highlight the role of FERR in the country's export-led growth.     

How does real exchange rate influence labour productivity in China?

Since China's transition to a market economy, the labour productivity growth has been dramatically rapid, in particular since 1994. This speeding up has been accompanied by the reverse of the exchange rate policy of China, which has strongly depreciated its currency before 1994, and then either appreciated or stabilized it. The theoretical arguments suggesting several kinds of real exchange rate impact on labour productivity are developed. An econometric model is then proposed and estimated, using panel data for the twenty-nine Chinese provinces and for the period from 1986 to 2007. The econometric results show that the appreciation of the real exchange rate had a favourable effect on the labour productivity growth, leading to a kind of virtuous circle: the real appreciation of the currency boosts the growth of labour productivity while, according to the Balassa–Samuelson effect, productivity growth tends to push up the real appreciation. Moreover, this favourable effect is stronger in inland provinces than in coastal provinces, contributing to a minimizing of the gap between inland and coastal provinces.     

Wages,Productivity and Labour's Declining Income Share in Post‐Apartheid South Africa

The Marikana incident in 2012, as well as the protracted strikes by platinum miners, metal and postal workers in 2014 suggest that not all is well in the South African labour market. Even though those in employment are better off than the unemployed poor, macroeconomic data indicate that labour's share in gross value added has declined significantly during the first two decades following the first democratic election in 1994. A falling share of labour in income also means, by definition, that average labour productivity growth outstrips real wages growth. Data for South Africa suggest that productivity has indeed increased faster than wages in South Africa. This article argues that financialisation and more aggressive returns‐oriented investment strategies applied by for instance large investment institutions translated into higher required rates of return on capital, which in turn caused an increased implementation of capital‐augmenting labour‐saving technology that reduces labour's share in income.