Wages,work intensity and unemployment in Japan,UK and USA

This paper focuses on the impact of excess labour supply on wage inflation in Japan, the US and the UK. Excess labour supply is not simply measured as officially registered unemployed persons but includes a measure of excess supply within the firm, i.e. work intensity. The empirical analysis confirms the importance of broadening the unemployment definition. Interesting differences arise in the cross-country comparison. Our key conclusions are that work intensity is an important factor in determining wage inflation, and that results based on recorded unemployment rates alone seriously underestimate the flexibility of real wages.     

Spell durations with long unemployment insurance periods

This paper uses data from a natural experiment to investigate the potential incentive effect of a fixed unemployment insurance period. We compare two large groups of Norwegian unemployed persons who registered as unemployed in 1990 and 1991. The last group was affected by a rule change that in practice extended the length of unemployment benefits to more than 3 years. Our data are taken from official records, and we construct unemployment durations by combining information from the unemployment registers with employers' records. We use a proportional hazard model with a flexible baseline. The results suggest that the main effect of benefits running out is to make people drop out of the unemployment register. We find neither clear evidence that the hazard into employment increased when the end of benefits approached in the pre-liberalisation group, nor that behaviour in this part of the spells changed after the reform. On the other hand, our results suggest that the reform had an all over negative effect on the employment hazard.     

Ranking of job applicants,on-the-job search,and persistent unemployment

We formulate an efficiency wage model with on-the-job search where wages depend on turnover and employers may use information on whether the searching worker is employed or unemployed as a hiring criterion. We show theoretically that such ranking of job applicants by employment status raises both the level and the persistence of unemployment and numerically that the effects may be substantial. More prevalent ranking in Europe compared to the US (because of more rigid wage structures, etc.) could potentially help to explain the high and persistent unemployment in Europe.     

Replacement rates and labour market behaviour

This paper studies how the replacement rate, defined as the ratio of disposable income when unemployed to expected disposable income if beginning to work, affects individuals’ transition rate from unemployment. Linked register data, representing a local Finnish labour market in 1996, are analysed with piece-wise constant exponential hazard models. Results suggest that the effect of the replacement rate and, thus, of “unemployment traps”, is fairly modest. It does not seem to change with time spent unemployed. The impact on the transition rate into employment is lower than on the transition rate out of the labour force. Unemployment insurance recipients are found to be less sensitive to changes in the replacement rate than are unemployment assistance recipients.     

Boon or bane? Others' unemployment,well-being and job insecurity

The social norm of unemployment suggests that aggregate unemployment reduces the well-being of the employed, but has a far smaller effect on the unemployed. We use German panel data to reproduce this standard result, but then suggest that the appropriate distinction may not be between employment and unemployment, but rather between higher and lower levels of labour-market security, at least for men. Men with good job prospects, both employed and unemployed, are strongly negatively affected by regional unemployment. However, insecure employed men and poor-prospect unemployed men are less negatively, or even positively, affected. There is however no clear relationship for women. We analyse labour-market inequality and unemployment hysteresis in the light of our results.     

The welfare cost of taxation in a labour market with unemployment and non-participation

The standard public economics analysis of the welfare cost of labour income taxation is based on the estimation of labour supply functions that treat unemployed individuals as non-participants. This paper applies econometric models of multinomial discrete choice to the labour market, explicitly allowing individuals to be in any of three possible states (employment, unemployment and non-participation). Based on these estimates, we present calculations of the dead-weight loss (DWL) of taxes, which turn out to be larger than those suggested by the literature.     

Reconciling theory and empirics on the role of unemployment in mortgage default

Empirical models of mortgage default typically find that the influence of unemployment is negligible compared to other well known risk factors such as high borrower leverage or low borrower FICO scores. This is at odds with theory, which assigns a critical role to unemployment in the decision to stop payment on a mortgage. We help reconcile this divergence by employing a novel empirical strategy involving simulated unemployment histories to measure the severity of attenuation bias in loan-level estimations of default risk due to a borrower becoming unemployed. Attenuation bias results because individual data on unemployment status is unobserved, requiring that a market-wide unemployment rate be used as a proxy. Attenuation is extreme, with our results suggesting that the use of an aggregate unemployment rate in lieu of actual borrower unemployment status results in default risk from a borrower becoming unemployed being underestimated by a factor more than 100. In addition, our analysis indicates that adding the unemployment rate as a proxy for the missing borrower-specific unemployment indicator does not improve the accuracy of the estimated model over the specification without the proxy variable included. Hence, aggregate portfolio-level risk estimates for mortgage guarantors such as FHA also are not improved.These views represent those of the authors and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System. This is a revised version of a paper that previously circulated under the title “Unemployment and Unobserved Credit Risk in the FHA Single Family Mortgage Insurance Fund (NBER Working Paper No. 18880). John Grigsby provided excellent research assistance. We appreciate the helpful comments of Andrew Haughwout, Wilbert van der Klaauw, the editor (Stuart Rosenthal) and referees, but remain responsible for any errors.     

Information shocks and the empirical evaluation of training programs during unemployment spells

We study the role of notifications in the evaluation of training programs for unemployed workers. Using a unique administrative data set containing the dates when information is exchanged between job seekers and caseworkers, we address three questions: Do information shocks, such as notification of future training, have an effect on unemployment duration? What is the joint effect of notification and training programs on unemployment? Can ignoring information shocks lead to a large bias in the estimation of the effect of training programs? We discuss these issues through the lens of a job search model and then conduct an empirical analysis following a “random effects” approach to deal with selectivity. We find that notification has a strong positive effect on the training probability but a negative one on the probability of leaving unemployment. This “attraction” effect highlights the importance of accounting for notifications in the evaluation of active labor market policies.     

What does it take to be (counted as) unemployed? The case of Spain

This paper analyzes the effects of the new European Commission regulation 1897/2000 which establishes a new definition of unemployment. It first examines the conditions that unemployed people have to meet in order to be deleted from unemployment by the new notion, to turn then to an application to the case of Spain, the first country where the new regulation was implemented. The paper then turns to study whether the very nature of the regulation is warranted, i.e. whether it is appropriate to delete passive job seekers from unemployment, on the basis of their labour market behaviour. The conclusion is that the new regulation does not capture the real complexities of the labour market.     

Equilibrium search unemployment with explicit spatial frictions

Assuming that job search efficiency decreases with distance to jobs, workers' location in a city depends on spatial elements such as commuting costs and land prices and on labour elements such as wages and the matching technology. In the absence of moving costs, we show that there exists a unique equilibrium in which employed and unemployed workers are perfectly segregated but move at each employment transition. We investigate the interactions between the land and the labour market equilibrium and show under which condition they are interdependent. When relocation costs become positive, a new zone appears in which both the employed and the unemployed co-exist and are not mobile. We demonstrate that the size of this area goes continuously to zero when moving costs vanish. Finally, we endogeneize search effort, show that it negatively depends on distance to jobs and that long and short-term unemployed workers coexist and locate in different areas of the city.     

Does subsidised temporary employment get the unemployed back to work? Aneconometric analysis of two different schemes

Subsidised employment is an important tool of active labour market policies to improve the reemployment chances of the unemployed. Using unusually informative individual data from administrative records, we investigate the effects of two different schemes of subsidised temporary employment implemented in Switzerland: non-profit employment programmes (EP) and a subsidy for temporary jobs (TEMP) in private and public firms. Econometric matching methods show that TEMP is more successful than EP in getting the unemployed back to work. Compared to not participating in any programme, EP and TEMP are ineffective for unemployed who find jobs easily anyway or have a short unemployment spell. For potential and actual long-term unemployed, both programmes may have positive effects, but the effect of TEMP is larger.     

Unemployment Experiences of Young Men: on the Road to Stable Employment?*

This study examines the unemployment experiences of young men in the United Kingdom over the period 1982.IV–1998.I. The empirical results show that repeated unemployment is a dominant feature of the UK labour market and that individual heterogeneity affects mainly the incidence of unemployment and only to a much lesser extent the duration of unemployment. We estimate that about 73% of the young unemployed find stable employment before the age of 35. The remaining 27%, concentrated among the lower‐skilled, keep returning into unemployment, suggesting structural employment instability. These findings imply that a labour market programme targeted at increasing the employability of the young unemployed would yield long‐term benefits by not only getting them out of unemployment but also keeping them out of unemployment.     

Regional migration in Spain: the effect of personal characteristics and of unemployment,wage and house price differentials using pooled cross-sections

We present an empirical model of individual migration using time-series of cross-sections from the Spanish Labour Force Surveys 1987–1991. Personal characteristics not only have an important direct effect on migration decisions but also alter the effect of regional variables. We find that the estimated probability of migration for the unemployed not registered, who are known for certain not to receive benefit, is higher than that of the employed which in turn is higher than that of the unemployed registered, which includes all the benefits recipients. An important finding is that the effect of regional unemployment on migration is positive for the unemployed not registered but is important and negative for those registered.     

Employment effects of extended geographic scope in job search

This paper uses a unique possibility to link unemployed individuals' stated willingness to move for work with administrative data, giving us the possibility to analyse the effects of individual willingness-to-move on labour market outcome. Those with extended geographic job search area have a higher probability of finding a job. However, the greatest effect is found on the local labour market, indicating that it is not the extended geographic scope per se that increases the likelihood of escaping unemployment, but differences in unobservable characteristics between those who use an extended search area and those who do not.     

Turning Unemployment into Self‐Employment: Effectiveness of Two Start‐Up Programmes*

Turning unemployment into self‐employment has become a major focus of German active labour market policy (ALMP) in recent years. If effective, this would not only reduce Germany's persistently high unemployment rate, but also increase its notoriously low self‐employment rate. Empirical evidence on the effectiveness of such programmes is scarce. We evaluate the effectiveness of two start‐up programmes for the unemployed, where we include the probability of being employed, the probability of being unemployed and personal income as outcome variables. Our results show that at the end of the observation period, both programmes are effective. The considerable positive effects present a stark contrast to findings from evaluations of other German ALMP programmes in recent years. Hence, ALMP programmes aimed at moving the unemployed into self‐employment may prove to be among the most effective, both in Germany and elsewhere.     

Equilibrium unemployment and wage formation with matching frictions and worker moral hazard

This paper combines the shirking and the matching approaches of equilibrium unemployment in order to endogenize the wage formation process as a function of labour market conditions. The steady-state equilibrium can take two forms depending on whether the no-shirking condition is binding or not. It is demonstrated that the efficiency wage approach is relevant when the unemployment rate is above a certain threshold. Furthermore, an efficiency wage is more likely when the disutility of effort is high, recruiting costs and workers' bargaining power are low, inspections are unlikely and the workers' productivity is weak.     

On-the-job search equilibrium with endogenous unemployment benefits

This paper develops an on-the-job search model with wage posting where unemployment benefits are proportional to past wages. We emphasize that this contributes to increasing the reservation wages of unemployed workers and introduces a feedback effect of the distribution of wages on the distribution of unemployment benefits. We show that the model predictions are consistent with some stylized French facts and quantify the impact of inefficient rejections of low-wage offers by the unemployed. We find that, by reducing the indexing of unemployment benefits to previous earnings and increasing lump-sum transfers, it is possible to increase both employment and welfare.     

Are unemployment rates in OECD countries stationary? Evidence from univariate and panel unit root tests

This paper revisits the dynamics of unemployment rate for 29 OECD countries over the period of 1980–2013. Numerous empirical studies of the dynamics of unemployment rate are carried out within a linear framework. However, unemployment rate can show nonlinear behaviour as a result of business cycles or some idiosyncratic factors specific to labour market (Cancelo, 2007). Thus, as a testing strategy, we first perform Harvey, Leybourne, and Xiao (2008) linearity unit root test and then apply the newly ESTAR nonlinear unit root test suggested by Kruse (2011). This test has higher power than conventional unit root tests when time series exhibits nonlinear behaviour. Our empirical findings provide significant evidence in favour of unemployment rate stationarity for 25 countries. For robustness purpose, we have also used panel unit root tests without and with structural breaks. The empirical results show that unemployment hysteresis hypothesis is strongly rejected, when taking into account the cross-sectional and structural break assumptions. Thus, unemployment rate is expected to return back to their natural levels without executing any costly macroeconomic labour market policies by the OECD’s governments.     

Estimating the probability of leaving unemployment using uncompleted spells from repeated cross-section data

We propose a new econometric estimation method for analyzing the probability of leaving unemployment using uncompleted spells from repeated cross-section data, which can be especially useful when panel data are not available. The proposed method-of-moments-based estimator has two important features: (1) it estimates the exit probability at the individual level and (2) it does not rely on the stationarity assumption of the inflow composition. We illustrate and gauge the performance of the proposed estimator using Spanish Labor Force Survey data, and analyze the changes in distribution of unemployment between the 1980s and 1990s during a period of labor market reform. We find that the relative probability of leaving unemployment for the short-term unemployed compared to the long-term unemployed becomes significantly higher in the 1990s.