Offshoring,wages, and employment: Theory and evidence

This paper investigates the wage and employment effects of offshoring. I use firm-level data and two events in Mexico as a natural experiment to identify the effects of a fall in the marginal cost of offshoring to Mexico. I find that domestic wages actually rise at US firms likely to take advantage of this new offshoring opportunity. At the same time, domestic wages fall at US firms unlikely to take advantage of this opportunity. Furthermore, I find no evidence of greater domestic job loss at the former compared to the latter firms. These findings are consistent with productivity effects from offshoring. To explain the mechanism, I develop a theoretical framework that combines heterogeneous firms with imperfect labor markets and rent-sharing. Firms likely to take advantage of new offshoring opportunities increase their productivity and profitability at the expense of their competitors. Through rent-sharing, this channel leads to higher domestic wages at the former firms relative to the latter. Further, there is no empirical evidence of greater domestic job loss at the firms likely to expand their offshoring compared to their competitors that are unlikely to increase their offshoring.     

Output and wages with inequality averse agents

Abstract.  We analyse a two‐task work environment with risk‐neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract that, owing to his wealth constraint, leads to a rent that the other agent resents. We show that greater inequality aversion unambiguously decreases total output and therefore average labour productivity. More specifically, inequality aversion reduces effort, wage, and payoff of agent 1. Effects on wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firm's output function. JEL classification: D2, J3     

Redistribution,inequality, and growth: new evidence

We investigate the relationship between inequality, redistribution, and growth using a recently-compiled dataset that distinguishes clearly between market (pre-tax and transfer) and net (post tax and transfer) inequality, and allows us to calculate redistributive transfers for a large number of advanced and developing countries. Across a variety of estimation methods, data samples, and robustness checks, we find: (1) lower net inequality is robustly correlated with faster and more durable growth, controlling for the level of redistribution; (2) redistribution appears benign in terms of its impact on growth, except when it is extensive; and (3) inequality seems to affect growth through human capital accumulation and fertility channels.     

Ageing, productivity and wages in Austria: sector level evidence

In this paper we analyse the link between the age structure of the labour force and average labour productivity as well as average wage across industrial sectors. While this intermediate economic level has been under-explored up to now, we will argue that it provides valuable insights in several respects. Our analysis is based on a panel data set ranging over 6 years (2002–2007). It covers the sectors of mining, manufacturing and market oriented services in the Austrian economy. Our results exhibit a positive correlation of the share of older employees and productivity, whereas we cannot find any evidence for a significant relationship of the share of younger employees and productivity. Moreover, the estimated age-wage pattern does not hint at an over-payment of older employees.     

Unions,wages and productivity: some evidence from UK engineering firms

Estimates of union wage and productivity effects are derived using primary micro-level panel data for a sample of firms in the UK engineering industry. Union wage differentials of the order of 10% are suggested from the results, whereas union productivity impacts appear to be non-linear with respect to union density.     

Gender, piece rates and wages: evidence from matched employer-employee data

Why are women disproportionately on piece rates? We investigatethree possible explanations: (1) Women are more likely to beon piece rates, because they have a shorter expected tenurethan men. (2) A greater demand for flexibility between workand home attracts women to work place technologies suitablefor variable pay based on individual performance. (3) Womenprefer piece rates, because they are subject to less wage discriminationwhen objective performance measures are available. The weightof our empirical evidence supports the third hypothesis. Theunexplained gender wage gap is substantially smaller in thepiece-rate regime than in the time-wage regime.     

Wage inequality and overeducation in a model with efficiency wages

Abstract.  This paper shows that the existence and persistence of 'overeducation' can be explained by an extension of the efficiency wage model. When calibrated to fit the amounts of overeducation found in most empirical studies, the model implies that both the relative wage and the relative employment of high‐skill workers depend inversely on aggregate economic activity. Keeping aggregate employment constant, furthermore, low‐skill unemployment rises, following an increase in the relative supply of high‐skill labour, and relative wages may be insensitive to changes in relative labour supplies. The model may help to explain rising wage inequality in some countries since the early 1970s. JEL classification: J31     

Finance and inequality: Channels and evidence

We provide a framework to interpret the recent literature on financial development and inequality. In many developing countries, access to funding and financial services by firms and households is still very skewed. Recent evidence suggests that poor access does not only reflect economic constraints but also barriers erected by insiders. Inequality affects the distribution of political influence, so financial regulation often is easily captured by established interests in unequal countries. Captured reforms deepen rather than broaden access, as small elites obtain most of the benefits while risks are socialized. Financial liberalization motivated to increase access may in practice increase fragility and inequality, and lead to political backlash against reforms. Thus financial reforms may succeed only if matched by a buildup in oversight institutions. Journal of Comparative Economics 35 (4) (2007) 748–773.     

Prospect theory in the wild: how good is the nonexperimental evidence for prospect theory?

ABSTRACT

Prospect theory is widely thought to be one of the best-confirmed accounts of human decision-making under risk. There are numerous claims in the literature that various kinds of nonexperimental, observational evidence provide strong support for prospect theory. We investigate the veracity of these claims using a set of philosophy of science morals and a careful delineation of models of choice under risk, focussing on the extant versions of prospect theory and their various components. We challenge the claim that prospect theory is well supported because it explains the equity premium puzzle. In addition, we analyse a major international survey thought to support prospect theory and argue that the support is questionable, both for statistical reasons and because the evidence itself is mixed. Our analyses highlight some important ideas in the philosophy of science and caution against strong claims about support for prospect theory that rely on nonexperimental, observational evidence.     

Microfinance and gender inequality: cross-country evidence

Microfinance enables poor women to engage in income-generating activities, which helps them become financially independent, strengthening their decision-making power within the household and society. Consequently, microfinance has the potential to reduce gender inequality (GI). Case-study evidence from across the developing world both supports and contradicts this hypothesis. We therefore revisit this issue using macroeconomic cross-country panel data for 64 developing economies over the period 2003–2014. We find that women’s participation in microfinance is associated with a reduction in GI. However, regional interactions reveal that cultural factors are likely to influence the GI–microfinance nexus.     

Labour-market institutions, (un)employment,wages, and growth: theory and data

We analyse the implications of labour-market institutions on wage inequality in favour of skilled labour, on relative unemployment of unskilled labour, and on the economic growth rate in two clusters resulting from 27 OECD countries: Cluster 1, closely related with the Anglo-Saxon model, and Cluster 2, dominated by the Continental-European model. By linking the unskilled wage to the skilled one in Cluster 2, due to the indexation of social benefits to per-capita income, we accommodate the observed paths of the three variables in both clusters between 1991 and 2008: Cluster 1 presents a higher wage inequality in favour of skilled labour, a lower unemployment of the unskilled labour, and a better economic growth rate.     

Workplace risks and wages: Canadian evidence from alternative models

Three alternative models of compensating wage premiums for risk are estimated: the conventional OLS wage regression; an endogenous risk model that accounts for the simultaneity that may occur if workers of high potential earnings prefer safer jobs; and a self-selection model to account for the possibility that workers sort into jobs based on unobserved tolerance for risk that affects their productivity in dangerous work environments. The results suggest that the existing Canadian estimates, which have been based on the basic model, may seriously underestimate the wage premium for risk and hence the implied cost of fatal and non-fatal injuries. JEL Classification: J28, J31
Risques au travail et salaires: résultats canadiens pour plusieurs modèles. Les auteurs calibrent trois modèles pour évaluer la compensation salariale pour les risques au travail: l'équation conventionnelle de régression des salaires estimée par la méthode des moindres carrés ordinaires; un modèle de risque endogène qui tient compte de la simultanéité qui peut se produire si les travailleurs dont les revenus potentiels sont élevés préfèrent les emplois où il y a moins de risques; un modèle d'auto-sélection où les travailleurs se répartissent entre les emplois sur la base d'une tolérance non-observée pour le risque qui affecte leur productivité dans des environnements de travail dangereux. Les résultats suggèrent que les évaluations canadiennes en vogue, qui sont fondées sur le modèle de base, peuvent sous-estimer sérieusement la prime salariale de risque et donc les coûts des blessures mortelles ou non que les accidents entraînent.     

Spot market wages,implicit contracts and technological change: skill-level evidence from Finland

This article investigates the relevance of the theories of implicit contracts and spot market model to the skill-level wages in Finland. We use linked worker-firm panel data over the period from 1991 to 2004, which included major institutional and technological changes. We find similar patterns in the wage flexibility of primary and highly educated workers: their wages increased with the decreasing spot market unemployment rate after the EU membership still exhibiting some weak backward linkages. The wages of the secondary-educated did not follow the decreasing spot market unemployment, but instead some signs of the full commitment risk sharing were found.     

Income inequality and inflation: the cross-country evidence

Different strands of the political economy approach to macroeconomic policy imply a link between income inequality and inflation. This article tests this proposition using a newly assembled data set on income distribution. The results show that income inequality is associated with higher inflation. This association, although not economically large, holds for democracies as well as nondemocracies. Sensitivity analysis suggests that the results are not due to measurement error, reverse causation, or omitted variables.     

Microfinance and income inequality: New macrolevel evidence

This paper addresses the empirical question of whether microfinance has any impact on income inequality at the macrolevel. Very little research has been conducted on the relationship between the macrolevel scale of microfinance and income inequality over time in a country and across countries. Based on panel‐data techniques, with annual data from 85 countries from 2001 to 2012 and a broad theoretical framework on microfinance and inequality, we provide empirical evidence that suggests that increases in the macrolevel scale of microcredit in a country contribute to reducing income inequality within that country over time. Finally, since microfinance may be endogenous, we used instruments from the existing literature to control for this problem.     

Market wages,reservation wages,and retirement decisions

The paper is an empirical cross-section study of the retirement decisions of American white men between the ages of 58 and 67, predicated on the theoretical notion that an individual retires when his reservation wage exceeds his market wage. Reservation wages are derived from an explicit utility function in which the most critical taste parameter is assumed to vary both systematically and randomly across individuals. Market wages are derived from a standard wage equation adjusted to the special circumstances of older workers. The two equations are estimated jointly by maximum likelihood, which takes into account the potential selectivity bias inherent in the model (low-wage individuals tend to retire and cease reporting their market wage). The model is reasonably successful in predicting retirement decisions, and casts serious doubt on previous claims that the social security system induces many workers to retire earlier than they otherwise would. The normal effects of aging (on both market and reservation wages) and the incentives set up by private pension plans are estimated to be major causes of retirement.     

Sticky wages,efficiency wages,and market processes

Work on this article was supported by a grant from the Research Committee of the College of Business Administration, University of South Florida.     

Growth,inequality, and poverty reduction in developing countries: Recent global evidence

The study presents comparative global evidence on the transformation of economic growth to poverty reduction in developing countries, with emphasis on the role of income inequality. The focus is on the period since the early-mid-1990s when growth in these countries as a group has been relatively strong, surpassing that of the advanced economies. Both regional and country-specific data are analyzed for the $1.25 and $2.50-level poverty headcount ratios using World Bank Povcalnet data. The study finds that on average income growth has been the major driving force behind both the declines and increases in poverty. The study, however, documents substantial regional and country differences that are masked by this ‘average’ dominant-growth story. While in the majority of countries, growth was the major factor behind falling or increasing poverty, inequality, nevertheless, played the crucial role in poverty behavior in a large number of countries. And, even in those countries where growth has been the main driver of poverty-reduction, further progress could have occurred under relatively favorable income distribution. For more efficient policymaking, therefore, idiosyncratic attributes of countries should be emphasized. In general, high initial levels of inequality limit the effectiveness of growth in reducing poverty while growing inequality increases poverty directly for a given level of growth. It would seem judicious, therefore, to accord special attention to reducing inequality in certain countries where income distribution is especially unfavorable. Unfortunately, the present study also points to the limited effects of growth and inequality-reducing policies in low-income countries.     

Market volatility and inequality in earnings: experimental evidence

We analyze the volatility of actions in experimental oligopoly markets. Can the volatility, measured as the total variation in actions, be predicted by inequality in earnings of the previous period? We examine two types of differentiated markets, Cournot and Bertrand, and two informational conditions. We find for both types of markets and regardless of the information available to firms that inequality in earnings is a major factor for explaining volatility. The more equal profits are distributed, the less volatility is observed.