Unemployment Shocks and Income Distribution: How did the Nordic Countries Fare during their Crises?

We study the inequality of disposable income in Denmark, Finland, Norway and Sweden during the late 1980s and early 1990s when unemployment rose dramatically in all four countries. A standard measure of inequality — the Gini coefficient – was surprisingly stable in all countries during this period. By decomposing the Gini into income components, we test hypotheses about the reasons for this stable income distribution. Our most straightforward hypothesis, that rising unemployment benefits counteracted the impact of more unequally distributed earnings, receives only limited support. More complex mechanisms seem to have been at work.
JEL classification: D 30; D 31; J 60     

Inequality and business cycles in the U.S. and European Union countries

This paper derives the business cycle properties of some aggregate and disaggregate inequality indices for the U.S. and three European Union countries (United Kingdom, Italy, and Greece). The findings suggest that inequality indices move countercyclically with output in the U.S. and the United Kingdom, a procyclical behavior prevailed in Greece, and a mixed cycle influenced Italy. A common countercyclical pattern of inequality indices with inflation and unemployment characterizes the three large economies (U.S., United Kingdom, and Italy). Also, in most countries, the top income group seems to lose at the benefit of the rest during inflationary periods while, in all four countries, the poor will gain from inflation and suffer from unemployment.     

Unemployment insurance: The role of electoral systems and regional labour markets

Levels of insurance against unemployment vary considerably across countries. Replacement rates, the ratio relating income from unemployment to what people earned when they were employed, are higher in countries with proportional electoral systems than in countries with majoritarian systems. Also, replacement rates are positively correlated with per capita income and negatively correlated with the countries' unemployment rates. I develop an electoral competition model that replicates these stylized facts.     

The beneficial effects of generous unemployment benefits on profits and employment

Theories of the labor market generally predict that high unemployment benefits put upward pressure on wages, thus diminishing the profitability of employing labor and exacerbating unemployment. It remains to be explained why firms agree to contribute to generous schemes (replacement rates for general schemes in Europe and US are in the range 50–85%) that they are often willing to supplement (with sector- or firm-specific schemes that may involve even 100% replacement and long benefit duration). An answer can be found by including in the shirking–efficiency wage model, the hypotheses that workers are risk-averse and that those discharged for misconduct are not eligible to benefits. It is then optimal for risk-neutral firms (and for employment) to introduce an insurance scheme with full income coverage and with a duration limited only by the workers' participation constraint (there is no trade-off between level and duration of benefits). The more difficult it is to detect and fire shirkers, the higher is the rent workers enjoy above the competitive wage and the longer is the benefit duration consistent with the participation constraint. This result can be interpreted as a complementarity between the strictness of employment protection legislation (EPL) and the duration of benefits, which seems to conform with broad patterns observed in primary vs. secondary employment and in continental Europe vs. Anglo-Saxon countries.     

Social benefit expenditures and stagflation: evidence from the United States

Stagflation refers to the terrible economic malaise associated with declining growth, hyperinflation and high unemployment. Unlike previous cost-push explanations such as an overheated labour market and oil prices, this article suggests that social benefit expenditures are a potential cause of stagflation. We investigate the impact of social benefit expenditures on stagflation in the U.S. over the 1950–2014 period by employing an autoregressive distributed lag (ARDL) bounds testing approach to cointegration, which was developed by Pesaran, Shin, and Smith. The influence of social benefit expenditures on economic growth and inflation and unemployment rates is estimated. The empirical results from the U.S. suggest that economic growth responds negatively to social benefit expenditures, while inflation and unemployment rates are both positively associated with social benefit expenditures. Thus, government-led rigid welfare could contribute to stagflation in the U.S. Instead of increasing people’s happiness, the over-burdened welfare system could push people into economic malaise. This stagflation risk shouldn’t be ignored. These results are important for U.S. policymakers and can inform other governments characterized by high levels of well-being.     

A new approach to testing unemployment hysteresis

This paper proposes a novel approach to testing unemployment hysteresis. It examined the existence of hysteresis in the unemployment rates of four Nordic countries, namely Denmark, Finland, Norway and Sweden, for the period of 2000–2014. The study applied four alternative methods to analyse the data. The best estimation procedure was chosen in a simple and consistent way. As the findings indicated, the ADF test and FADF test failed to reject the null hypothesis of unemployment hysteresis in all four countries. The ADF–SB test produced mixed results: it rejected the null hypothesis of hysteresis for Denmark and Norway, but failed to reject the null hypothesis for Finland and Sweden. The FADF–SB test yielded more consistent findings: it rejected the null hypothesis for all four countries. Furthermore, findings from the F-tests clearly indicated that the FADF–SB test was the best method among the four proposed alternatives. Despite some discrepancies the findings of this study suggest that unemployment in the four Nordic countries had a mean reversion tendency.     

Equilibrium unemployment, search behaviour and unemployment persistency

Unemployment persistency and high equilibrium unemployment isoften assumed to be caused by rigidities and low search efficiencyin the labour market, especially in European welfare stateswith generous income replacement schemes. These arguments aretested on data from Sweden, an old welfare state with a longperiod of full employment that has changed into a situationwith high unemployment. Data show a clear and very strong unemploymentduration dependency, but it is not possible to prove that thisis a result of low employability among the long-term unemployed.Getting a job is most of all associated with relative qualifications,recall expectations and local labour market conditions, andnot with search behaviour or high wage demands. It is arguedthat unemployment duration when unemployment is high can bestbe understood as a selection process rather than a search process,and that econometric estimations of equilibrium unemploymentare too pessimistic about the potential for an expansive economicpolicy. It is also argued that an active labour market policyis a more efficient compliment to such a policy than changesin income replacement ratios.     

A comparison of unemployment, income and mortality interaction for five European countries

The relationship between unemployment and health status is examined in a comparative study of five European countries using a time series model. "The hypothesis considered in this paper is that the secular decline in mortality rates can be attributed to the secular rise in real per capita income and that the remaining fluctuations in mortality rates can be explained by cyclical movements in income and variations in unemployment." The data concern the Federal Republic of Germany, France, Italy, Sweden, and Ireland.     

The effect of unemployment on labour productivity: an international comparative analysis

This is a comparative empirical analysis of the effect of unemployment - via a ‘work-intensity effect’ and/or a ‘workplace-innovation effect’ - on manufacturing productivity growth in eight advanced capitalist economies. My econometric results confirm earlier findings of positive work-intensity and workplace-innovation effects of unemployment on productivity growth in the United States; but I do not obtain similarly strong results for the other countries, and in Germany and Sweden I find evidence of negative unemployment effects. My findings are consistent with the comparative hypothesis that the sign and strength of unemployment effects on productivity growth will vary negatively with the degree to which a country's socioeconomic environment is characterized by cooperative capital-labour relations and worker security.     

Unemployment and interindustry labour mobility in Canada in the 1980s

The determinants of interindustry mobility of labour, and its relationship to the unemployment rate is examined, using micro-data on Canadian workers from 1980/81, 1982/83 and 1985/86. It contrasts the implications of the ‘dynamic reallocation’ model (Lilien, 1982) in which rising aggregate unemployment is due to in creased dispersion in the net hiring rates of firms (implying positive covariance of interindustry mobility and unemployment rates) with the older ‘Keynesian’ perspective that high unemployment ‘chills’ labour market mobility, implying a neative relationship. Qualified support is obtained for the ‘chilling’ model, as well as standard results on the role of job tenure, hours worked, etc. The general moral is the cyclical sensitivity of labour market behaviour, i.e. individuals appear to react to the aggregate unemployment rate.     

A new consensus-based unemployment indicator

In this study we present a novel approach to measure the level of consensus among agents’ expectations. The proposed framework allows us to design a positional indicator that gives the percentage of agreement between survey expectations. While other aggregation methods such as the balance, which is constructed as the difference between the percentages of respondents giving positive and negative replies, explicitly omit the neutral information, the proposed metric allows synthesizing the information coming from all response categories, including the percentage of respondents who do not expect any change. In order to assess the performance of the proposed measure of consensus, we compare its ability to track the evolution of unemployment to that of the balance in eight European countries. With this aim, we scale both measures to generate one-period ahead forecasts of the unemployment rate. We find that the consensus-based unemployment indicator outperforms the balance in all countries except Denmark and Sweden, which suggests that the level of agreement among agents’ expectations is a good predictor of unemployment.     

Examining an Alcohol consumption Kuznets Curve for developed countries

In this paper we expand the Simon Kuznets´ (1955) hypothesis to an ‘Alcohol consumption Kuznets curve’, showing that as income rise, further resources become available to buy more alcohol. Hence, people consume more alcohol and alcohol consumption rates increase. Nevertheless, as income rises, individual health becomes a more recognized point of interest and people decrease their alcohol consumption levels in order to increase their health status. For a selection of OECD countries, we find empirical evidence that alcohol consumption is influenced by income, inequality, unemployment rates, life expectancy and therefore the business cycle. Moreover, the demographic structure (ageing and youth ratio) does not affect the alcohol consumption level.     

Unemployment insurance, moral hazard, and economic growth

It is important but difficult to distinguish between desirable and undesirable effects of unemployment insurance (UI) that are observationally equivalent when designing optimal UI schemes. For example, a UI-induced rise in the wage rate caused by workers taking more time to match their skills with job vacancies is desirable. However, another view of the same observation is that UI causes permanently higher involuntary unemployment by raising the reservation wage. This paper avoids this problem by regarding the trade-off between the UI replacement rates and unemployment as an intermediate relationship that matters only as far as it impacts economic growth. An empirical analysis of UI replacement rates, unemployment rates, and growth rates using annual panel data finds UI replacement rates are associated with higher unemployment. However, no significant relationship is found between UI-related unemployment and the real growth rate of gross domestic product.An earlier version of this paper was presented at the Fiftieth International Atlantic Economic Conference, October 15–18, 2000, Charleston, South Carolina. Financial support from the Scottish Economic Society and the University of Stirling is gratefully acknowledged. The Organization for Economic Cooperation and Development generously provided access to their database on benefit entitlements and gross replacement rates. The authors are grateful to an anonymous referee for constructive comments.     

Labour market institutions and wage setting: evidence for OECD countries

The main channel through which labour market institutions are supposed to work in affecting unemployment is through their effects on the key parameters of the wage curve. In particular, labour market institutions may have both a direct wage push (or level) effect, i.e. change the level of the real wage for any given level of the unemployment rate and productivity, and an indirect slope effect, i.e. change the responsiveness of the real wage to the unemployment rate. The question this article addresses is whether there is any evidence that these transmission mechanisms were at work in a group of 20 Organization for Economic Co-operation and Development (OECD) countries over the period 1960 to 1999. The analysis is accomplished in two steps. Pooled Mean Group (PMG) estimates of a wage equation including unemployment, productivity and a set of wage push institutions are first obtained, allowing only a subset of institutional coefficient to be homogeneous, while leaving the unemployment and other coefficients free to differ across countries. The country specific estimates of the unemployment coefficients are then used to investigate whether and to what extent cross-country heterogeneity in the estimated wage response to unemployment is related to institutional differences. The results support the existence of significant wage push effects of union density and benefit replacement rates, and of significant slope effects of benefit replacement rates, benefit duration and employment protection. A more generous unemployment benefit structure is found to lower the wage responsiveness to unemployment, while higher employment protection, contrary to what one expects, is found to enhance it. No significant level and slope effects are found for the tax wedge and bargaining coordination.     

THE SIZE DISTRIBUTION OF INCOME DURING INFLATION

This paper analyzes the effects of inflation on the size distribution of income, making use of a microsimulation model. It goes beyond earlier analyses not only in the use of microdata but also in the types of inflation modeled. Two different income concepts are used, one the money income concept of the U.S. Census Bureau and the second, called Accrued Comprehensive Income, based on the concept of income as consumption plus the change in net worth. The results of the simulation inflations are presented graphically, as the ratio of real income with inflation to real income without, by income class. The analysis concludes that the income concept chosen is crucially important. While low income households suffer modest losses and middle income households are largely unaffected, whatever income concept is used, the effects on upper income households are extremely sensitive. With a simple money income concept, the well-to-do appear to benefit from inflation but a broader concept reverses this effect. A policy to negate the distributional effect of inflation would benefit primarily the upper income households. Similarly, macroeconomic policies designed to reduce inflation at the price of slower growth and greater unemployment would not aid lower income groups to a significant degree.     

Unemployment Duration and Inflows onto the Disability Support Pension Program: Evidence from FaCS LDS Data

From the administrative data of the Australian Department of Family and Community Services it is found that a large proportion of Disability Support Pension (DSP) recipients transferred from unemployment benefits. Among those who transferred to DSP from unemployment benefits, a large proportion experienced multiple spells of income support receipt prior to the transition and a majority had more than a half‐year pre‐transition unemployment duration, with the average pre‐transition unemployment duration being more than one year. These findings suggest that the unemployment benefit is not simply a‘hold‐on’ benefit for those who experienced the unemployment—DSP transition. This article further examines what factors are associated with the transition. It is found that, among other things, the probability of transition to DSP from unemployment increases with duration on unemployment benefits.     

Testing for hysteresis in unemployment an unobserved components approach

We suggest a new test for hysteresis in unemployment based on an unobserved components model. Observed unemployment rates are decomposed into a natural rate component and a cyclical component. The impact of lagged cyclical shocks on the current natural component is the measure of hysteresis. To identify the two components of unemployment, we assume that the cyclical compoentn is correlated with capacity utilization. The model is applied to U.S. and German data. We find no evidence of hysteresis in U.S. data. German unemployment rates exhibit substantial hysteresis. A shock of 1.0 percent to the current cyclical component permanently increases future German natural rates by about 0.5 percent. For both countries, natural rate shocks turn out to be an important impulse mechanism to explain movements in observed unemployment rates.     

Further evidence on alternative theories of inflation and unemployment:the Scandination countries

The objective of this study is to estimate the inflation and unemployment models of various of macroeconomics as suggested by Sargent, Stein and Rea, and to test the validity of their propositions using the data of four Scandinavian countries, namely Denmark, Finland Norway and Sweden. The results provide some support for the new classical models on unemployment, but the monetory variables, as monetarists argue, have a significant effect on unemployment. With regard to inflation, the data of the Scandinavian countries do not support the monetarist proposition that inflation is always and everywhere a monetary phenomenon. However, the results support Keynesian propositions that economic slack represented by unemployment is important in explaining the rate of inflation.     

The portfolio behaviour of pension funds in the US: an econometric analysis of changes since the new regulation of 1974

In most Western countries, the rate of unemployment has shown a rising trend over the last decades. One of the standard explanations for this is that the ‘natural’ rate of unemployment has risen. In order to investigate this hypothesis, a simple demand–supply model of the Finnish labour market was constructed and estimated. It is proposed that if the development of the unemployment rates can be explained is such a traditional model framework, this would suggest that changes in the ‘natural’ rate are not, after all, the crucial reason for the increasing unemployment rates.

According to the results, the simple model was able to account for the changes in the unemployment rate very well. Furthermore, they seem to support a traditional Keynesian view of the problem, emphasizing output level and labour productivity as the main explanatory variables. Indirectly, it can be concluded that there seem to be no clear signs of a rising ‘natural’ rate of unemployment.