Unemployment accounts and employment incentives

We explore the far-reaching implications of replacing current unemployment benefit (UB) systems by an unemployment accounts (UAs) system. Under the UAs system, employed people are required to make ongoing contributions to their UAs and the balances in these accounts are available to them during periods of unemployment. The government is able to undertake balanced-budget interpersonal redistributions among the UAs. At the end of their working lives, people could transfer the remaining balances on their UAs into their pensions.We present an analytical framework to analyse the incentive effects of UAs and calibrate our model for the high high-unemployment countries of Europe. Our results suggest that this policy reform would significantly change people's employment incentives and could achieve reductions in unemployment without reducing the level of support to the unemployed.     

Heterogeneity, Job Creation and Unemployment Volatility

In this paper, I explore the impact of match‐specific heterogeneity at the job creation margin on business cycle fluctuations. I show that this form of heterogeneity alone does not help to amplify labor market volatility, either under full or under asymmetric information. First, I show analytically that, under full information, heterogeneity has no first‐order effect on the response of unemployment and job creation to productivity, and actually tends to dampen the response of market tightness. Then, in a series of calibrations, I show that with both full and asymmetric information, the model delivers labor market volatilities close to the representative‐agent, full‐information benchmark.     

Capital Accumulation and Unemployment: A Tale of Two "Continents"

In contrast to much recent work regarding the causes of European unemployment, in this paper we emphasize the importance of capital accumulation. But unlike the few previous studies which have examined the relationship between capital accumulation and unemployment, we argue that what matters for the evolution of employment (and the unemployment rate) is not the absolute growth rate of a country's capital stock, but its evolution relative to other countries' capital stock. The empirical validity of the above statement is demonstrated for almost all OECD countries using quarterly time-series data for the period 1961–1995. More detailed evidence is also presented for Germany, Japan and the United Kingdom.     

Unemployment and Migration: Does Moving Help?

The migration behaviour of the unemployed in Finland is analysed in terms of the causal effect of moving on individual employment status. In 1994, 17 percent of the labour force was unemployed and the unemployment rate exhibited a very slow decline in 1994–1996. Over half of those who were unemployed at the end of 1994 were still unemployed two years later. The propensity to find a job is somewhat greater among migrants. However, the positive effect of moving diminishes once other personal characteristics are accounted for. Moreover, when controlling for endogenous migrant selectivity, an insignificant or even negative effect on employment status emerges. This indicates that the relatively better "quality" of the migrants (e.g. age, education, human capital and unobserved ability), rather than the act of moving itself, causes an improvement in re–employability. Hence, migration alone may not be a very effective mechanism for alleviating individual unemployment.
JEL classification : J 61; J 64     

Tax reforms under market distortions in product and labour markets

Using a two-agent model comprised of capitalists and workers, this paper examines the importance of imperfect competition in product and labour markets in determining the welfare effects of tax reform. The reform considered consists of eliminating the capital tax alongside a concurrent rise in the labour tax. In contrast to the perfectly competitive model, models with product or labour market failures each result in welfare losses for the workers in the long-run. In a realistic calibration to the UK economy, combining these imperfections implies that this tax reform will be Pareto improving in the long-run. However, these welfare gains over longer time horizons come at the cost of short-run losses, which, consistent with previous research, result in welfare losses for workers post-reform.     

Wage Flexibility and Unemployment: The Keynesian Perspective Revisited

Keynes' main concern in the General Theory is about the capacity of an economy to return to full employment equilibrium when subject to a (negative) demand shock. He maintains that money wages cuts may not help reabsorb unemployment, as they do not necessarily imply a fall in real wages. On the contrary, wage rigidity may be necessary for avoiding that a cumulative process propels the economy far away the full employment equilibrium. Co‐ordination failures in the investment‐saving market are behind this conclusion. However, the analysis is carried out within a static equilibrium framework. This paper is an attempt to focus on the problems of intertemporal co‐ordination arising within the context of a sequential economy. Our analysis of the out‐of‐equilibrium process of adjustment stirred by a shock allows to generalize the original Keynesian intuition. Unemployment emerges as the result of a lack of co‐ordination due to irreversibly constrained choices, and not only nominal but also real wage flexibility does not necessarily help to restore equilibrium. As a matter of fact, it may even be harmful, by triggering processes that make the economy diverge from equilibrium. Our analysis has important analytical implications as regards the role of market imperfections and the interpretation of the effects of monetary policy.     

Labor market shocks and retirement: Do government programs matter?

This paper argues that labor market conditions are an important and often overlooked determinant of retirement transitions. In our analysis, we examine how the unemployment rate affects retirement and whether the Social Security (SS) system and Unemployment Insurance (UI) system influence how older workers respond to labor market shocks. We use pooled cross-sectional data from the March Current Population Survey (CPS) in our analysis. We find that downturns in the labor market increase retirement transitions and that the magnitude of this effect is comparable to that associated with moderate changes in financial incentives to retire and to the threat of a health shock facing older workers. Interestingly, retirements only increase in response to an economic downturn once workers become SS-eligible, suggesting that retirement benefits may help to alleviate the income loss associated with a weak labor market. We also estimate the impact of UI generosity on retirement and find little consistent evidence of an effect. This suggests that in some ways SS may serve as a more effective form of unemployment insurance for older workers than UI.     

Effect of labor market policies on unemployment when firms adapt their recruitment strategy

Firms conduct interviews to select who to hire. Their recruitment strategies affect not only the hiring rate but also job destruction rate as more interviews increase the chances of finding the right worker for the job; a link mostly overlooked in the literature. I model this recruitment behavior and investigate the effects of labor market policies on unemployment. These policies change the value of hiring the right worker, altering firms' incentives to conduct interviews. Policies further affect job creation and destruction when firms adapt their recruitment strategies. Net effect of a policy on unemployment depends on the magnitude of change in job creation versus destruction. Qualitative analysis reveals that the effect of a policy on unemployment is mostly weakened with the introduction of firms' recruitment behavior to the model. Firing taxes still increase unemployment, albeit at a lower rate. The effect of hiring subsidies on unemployment is even reversed: Unemployment increases with hiring subsidies if firms adapt. Minimum wage and unemployment insurance policies are also analyzed.     

Labour market reform and the macroeconomic efficiency of the labour market in Australia

This paper assesses the effects of a decade and a half of labourmarket reform in Australia on labour market flexibility at themacroeconomic level. Increased labour market flexibility isinterpreted as reduced structural unemployment and enhancedefficiency of matching. We use shifts in the Beveridge Curveas a measure of changes in labour market efficiency (followingSolow, R., What is labour-market flexibility? What is it goodfor?, Keynes Lecture, British Academy, London, December, 1997).Time series analysis of unemployment, vacancies and other relevantvariables strongly suggests that changes in the efficiency oflabour market matching over the period reflect the cyclicaleffects of hysteresis rather than the effects of labour marketreform.     

Disability and Economy: A Game Theoretic Approach

This paper takes a game theoretic approach to disability‐related issues by constructing a model that studies the case of hereditary deafness on Martha's Vineyard Island, USA from the seventeenth century to the early years of twentieth, where the island community adjusted itself to the hereditary deafness so that it was not treated as a disability. The model of the present paper has two stages. First of all, there are two types of continua of agents, the deaf and the non‐deaf. In the first stage, the non‐deaf agents become either bilinguals or monolinguals. In the second stage, agents are classified into deaf people, bilinguals and monolinguals. They are then randomly matched to form a trio to play a three‐person bargaining game with infinite horizon, random proposers and language constraints. Two bargaining games are considered. The first one is a majority bargaining game where only two out of three can agree to implement a bargaining outcome. The second one is a unanimity bargaining game where all three agents are required to reach an agreement. The majority game exhibits strategic complementarity, while the unanimity game exhibits strategic substitutability. This paper also takes an inductive approach to examine how prejudice against people with disability may emerge.     

Unemployment hysteresis and the natural rate of vacancies

On the basis of macro data from 10 OECD countries, I find that the job vacancy rate outperforms the unemployment rate as a reliable measure of domestic inflationary pressure. Moreover, while the rate of unemployment affects inflation primarily through its difference, the vacancy rate operates through a level effect as well. In most countries, a unique equilibrium rate of vacancies seems to coexist with a drifting equilibrium rate of unemployment. I show that this result is consistent with existing theories of unemployment hysteresis that focus on depreciation of human capital and search activity during unemployment spells. First version received: October 1997/Final version received: June 2001     

Unemployment benefits and recall jobs: a split population model

We study the transitions out of unemployment of the recipients of insurance benefits, focusing on whether or not they are recalled to their previous employment. Specifically, a split population duration model (SPDM) for the recall decision by employers is compared with a standard duration model (SDM). We find significant differences between the SPDM and the SDM estimates, both with regard to their magnitude and expected sign. Some of the variables record undervalued estimated hazard rates in the SDM with respect to the SPDM.     

Cyclical Asymmetries in Unemployment Rates: International Evidence

This paper investigates to what extent the observed nonlinearities in the unemployment rates of six major developed economies are the response to cyclical asymmetries. Two classes of models are compared: strict smooth transition autoregressions and models where the transition variable is GDP growth, which is considered a more direct indicator of the business cycle. The empirical evidence points out that nonlinearities in unemployment rates are induced by cyclical asymmetries. It is also found that in most countries the unemployment rate looks stationary and reverts to a long-run equilibrium rate in periods of normal growth, while in extreme cyclical situations it tends to become nonstationary as if each extreme cyclical episode had its own path of equilibrium.      

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     

The macroeconomics of the labor market: three fundamental views

We distinguish and assess three fundamental views of the labor market regarding the movements in unemployment: (1) the frictionless equilibrium view; (2) the chain reaction theory, or prolonged adjustment view; and (3) the hysteresis view. While the frictionless view implies a clear compartmentalization between the short- and long-run, the hysteresis view implies that all the short-run fluctuations automatically turn into long-run changes in the unemployment rate. We assert the problems faced by these conceptions in explaining the diversity of labor market experiences across the OECD labor markets. We argue that the prolonged adjustment view can overcome these problems since it implies that the short, medium, and long-runs are interrelated, merging with one another along an intertemporal continuum.

Embodied Technical Change and the Fluctuations of Unemployment and Wages

A matching model where technological change is partially embodied in the job match is shown to be successful in explaining the variability of unemployment and vacancies. If we incorporate long‐term wage contracts into the model, it also explains a number of stylized facts on the dynamics of real wages, which have been found in the empirical labor literature.     

Fewer in Number but Harder to Employ: Incidence and Duration of Unemployment in an Economic Upswing

During an upswing in the Norwegian labour market in the early 1990s, inflow to unemployment fell by one-quarter from October 1991 to October 1993. In contrast, the employment probabilities of the inflow rose much less for males and even decreased for females. A duration analysis showed that the average "employability" of the unemployment inflow declined due to lower previous income, a lower proportion with job experience, a higher proportion with previous unemployment experience, a higher proportion with immigrant background, and a lower proportion on recall. They were fewer in number, but harder to employ.
JEL classification : E 32; J 64     

Contract settlement specification and price discovery: Empirical evidence in Australia individual share futures market

This study applies Geweke [J. Am. Stat. Assoc. 76 (1982) 304] measures of information flow and dependence between Australian individual share futures (ISF) contract and its underlying stock market to investigate whether the price discovery function of futures price has been enhanced after the switch of futures contracts from cash settlement to physical delivery. It is found that the spot market leads the futures market as the futures trading volume is rather small. Further tests suggest that the switch from cash settlement to physical delivery in the ISF contracts has reinforced the information flow from the spot market to the futures market.     

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.     

Interregional Migration of Human Capital and Unemployment Dynamics: Evidence from Italian Provinces

Since the mid‐1990s interregional migration flows in Italy have dramatically increased, especially from the South to the North. These flows are characterized by a strong component of human capital, involving a large number of workers with secondary and tertiary education. Using longitudinal data for the period 2002–2011 at NUTS‐3 territorial level, we document that long‐distance (i.e., South‐North) net migration of high‐skill workers has increased the unemployment at origin and decreased it at destination, thus deepening North–South unemployment disparities. On the other hand, long‐distance net migration of low‐skill workers has had the opposite effect, by lowering the unemployment at origin and raising it at destination. Further evidence also suggests that the diverging effect of high‐skill migration dominates the converging effect of low‐skill migration. Thus, concerns for an ‘internal brain drain’ from Southern regions look not groundless.