An input-output approach to the estimation of employment requirements in Europe

This study reports the results of an attempt to analyse the employment requirements per one million dollars of final demand on the basis of an input-output model, in which the standard technology matrix is partitioned into domestic and import input coefficient matrices for twelve European countries. International comparisons of employment requirements indicate that the labour productivity is higher for high income countries while employment requirements per one million dollars of final demand is less closely associated with the size of the country. Our results demonstrate that the total employment requirements estimated on the basis of the total input coefficients matrix or the domestic coefficients matrix retain the same ordinal ranking of the sectors. For developing countries, where the data are not available for domestic and import coefficients matrix separately, the methodology of estimating employment requirements (per unit of final demand) through total coefficients matrix may be adopted since our experience indicates that ranking of the sectors in terms of labour productivity is not altered between two approaches for twelve European countries.     

Does public‐sector employment fully crowd out private‐sector employment?

Employment matters for development because it can raise household income, lower inequality, promote economic growth, and contribute to political stability. Many countries have high rates of public employment, but what effect does this have on overall employment and unemployment rates? This paper investigates if and to what extent public‐sector employment crowds out (reduces) private‐sector employment. In particular, we estimate regressions of unemployment or private‐sector employment on two measures of public‐sector employment. The study uses an especially assembled dataset, which is novel for its coverage of a large sample of developing countries as part of a panel of rich and poor countries. Our results point to full or just about full crowding‐out for the entire sample. Unlike previous cross‐country studies, which were restricted to advanced economies, we are able to show that these results also apply to developing countries, although crowding‐out may not be quite as high as in advanced economies. The results mean that high rates of public employment have an offsetting large negative impact on private employment rates and do not reduce overall unemployment rates. With the qualifier that government activities may help the economy in other ways, our results imply that, rather than creating public‐sector jobs, scarce fiscal resources could be better spent on other developmental needs.     

Episodes of unemployment reduction in rich,middle-income and transition economies

This paper studies the incidence and determinants of episodes of drastic unemployment reduction, defined as swift, substantial, and sustained declines in unemployment. We identify 43 episodes over a period of nearly 3 decades in 94 rich, middle-income and transition countries. Unemployment reductions often coincide with an acceleration of growth and an improvement in macroeconomic conditions. Episodes are much more prevalent in countries with higher levels of unemployment and, given unemployment, are more likely in countries with better regulation. An efficient legal system that enforces contracts expeditiously is particularly important for reducing unemployment. The results imply that while employment is largely related to the business cycle, better regulation reduces likelihood of high unemployment and facilitates a more rapid recovery in the event unemployment builds up.     

Insider-outsider influences on industry wages

The persistence of high rates of unemployment in Europe has focused renewed attention on the wage determination process. One aspect which has received particular attention recently is the extent to which wages are determined by insiders, with outsiders having little impact on the wage bargain. If outsiders are disenfranchised in the wage determination process, they may be unable to underbid themselves into employment. The insider-outsider model, and the associated implication of hysteresis, thus provides a possible explanation for persistent involuntary un-employment. Most empirical work on the importance of the insider-outsider model and hysteresis has been done at the aggregate level, either by testing whether wage growth is related to the level or the change in unemployment, or by testing if employment or unemployment follows a random walk. This paper extends both of these lines of analysis to the industry level. Based on a specification which nests alternative models of the wage determination process, estimation results are presented for fifteen industries using annual data for fourteen industrialized countries, and for pooled time-series cross-country data. The paper also tests the hypothesis that only industry-specific variables are important to the determination of industry wages and considers whether differences in industry wage determination might help to understand cross-country differences in unemployment. The results offer considerable support to the insider view of wage determination. Industries in which wages seem to be determined by a natural rate/Phillips curve model — the primary competing model considered in the paper — appear to be the exception rather than the rule. Moreover, at the industry level hysteresis does not appear to characterise wage formation in the high-unemployment European countries to a greater extent than in North America and Japan.     

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.     

Labour market institutions and unemployment: an international panel data analysis

This paper deals with the effects of labour market institutions on unemployment in a panel of 19 OECD countries for the period 1960–2000. In contrast to many other studies, we use long time series and analyse cyclically adjusted trend values of the unemployment rate. Our novel contribution is the estimation of panel models where we allow for heterogeneous effects of institutions on unemployment. Our main results are, first, that on the average tighter employment protection, a higher tax burden on labour income and a more generous unemployment insurance system increase, whereas a higher centralization of wage negotiations decreases unemployment, and secondly, that the magnitude of the effects of institutions differs considerably between countries.     

Labor Taxation in Search Equilibrium with Home Production

Conventional models of equilibrium unemployment typically imply that proportional taxes on labor earnings are neutral with respect to unemployment as long as the tax does not affect the replacement rate provided by unemployment insurance, i.e. unemployment benefits relative to after–tax earnings. When home production is an option, the conventional results may no longer hold. This paper uses a search equilibrium model with home production to examine the employment and welfare implications of labor taxes. The employment effect of a rise in a proportional tax is found to be negative for sufficiently low replacement rates, whereas it is ambiguous for moderate and high replacement rates. Numerical calibrations of the model indicate that employment generally falls when labor taxes are raised.     

Urban job creation and unemployment in LDCs: Todaro vs. Harris and Todaro

Overwhelming urban migration occurred so rapidly in many developing countries that widespread unemployment and squalid living conditions are commonplace. For many of these countries, stopping urban migration has become a major policy. Two models propose 2 different theories of urban unemployment. Todaro's short-term effects model concludes that job creation actually causes unemployment. Todaro and Harris formulated a long-term effects model in which welfare subsidies create more employment and stimulate the economy. A real solution to urban job creation would include optimal allocation of investment between the rural and labor sectors. A once and for all hiring tax would reduce replacement hiring. It is impossible to design an optimal tax subsidy package for urban unemployment unless it includes knowledge of the dynamic response of migration and unemployment to the rate of net and gross hiring of labor. If subsidy taxes are levied on the agricultural sector, the net result may be a higher rate of capital formation in the (low social return) manufacturing sector and a lower one in the agricultural sector.     

Localized Technological Change and Unemployment in the Global Economy: a Schumpeterian approach

This paper develops a Schumpeterian approach to analyse the interaction between unemployment and localized technological change in a global competitive process. The model predicts that the present levels of unemployment are caused by a combination of three factors: (i) the localized character of the wave of information and communication technology generated in the more advanced countries which, because of this, it is characterized by a factor mix appropriate to economic systems where there is an abundance of capital and a relative scarcity of labour; (ii) the strong and rapid dynamic decline of competitive advantages and quasi-rents, based on the introduction of new information and communication technology; (iii) the strong international competitive pressure from countries with lower wage levels and a greater capability to host the affiliates of multinational companies and to imitate the new information and communication technologies developed in the innovative countries. The results of the empirical analysis, for the OECD countries in the years 1990–92, suggest that a country's competitiveness and therefore its share of total world demand and employment is mostly, if not exclusively, determined by its innovative capacity. Wage levels alone cannot, even when they fall, at least in relative terms, re-establish conditions of full employment: efficiency wages are an important complementary factor in building the innovation capacity of a country.     

Capital Stock, Unemployment and Wages in the UK and Germany

This paper is concerned with the view that capital formation is an important variable in the determination of unemployment and wages in Germany and the UK. Adverse demand shocks affect employment and investment. When shocks reverse, unemployment may not fall to previous levels due to insufficient capital. The empirical results show that unemployment has risen in the last twenty years in both countries due to insufficient investment. Policies that are aimed at stimulating investment may have a permanent effect on unemployment in Germany and the UK.     

Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits

We develop an equilibrium search-matching model with risk-neutral agents and two-sided ex-ante heterogeneity. Unemployment insurance has the standard effect of reducing employment, but also helps workers to get a suitable job. We show, through calibrations, how the mere difference on unemployment insurance, when countries experience a common skilled-biased technological shock, may result in differences in unemployment, productivity growth and wage inequality. These results are consistent with the contrasting performance of the labour market in Europe and the United States in the last twenty-five years. The model is used to address some political economy issues.     

Job Security,Financial Security and Worker Well‐being: New Evidence on the Effects of Flexible Employment

This paper uses panel data drawn from the Household, Income and Labour Dynamics in Australia (HILDA) survey to provide new evidence of the links between unemployment, wages, job security, financial security and workers' well‐being for workers in flexible employment. Our findings indicate that workers in flexible employment encounter more unemployment and experience increased job insecurity; unemployment is associated with wage penalties. Lower wages, job insecurity and financial insecurity affect well‐being. However, these negative outcomes are mitigated by longer job tenure. Our results have implications for moves towards a flexicurity model of employment     

Equity Control of Multinational Firms: Effects on Resource Allocation and National Welfare

In this paper, we re-examine the effects of equity control of multinational firms on resource allocation and national welfare in a model with rural–urban migration and urban unemployment. A large number of recipient (host) countries are developing countries with dual economies. We indicate, among other things, that a restriction on multinational investment may lower the unemployment rate and increase the total employment in the host country. Furthermore, we find that the restriction on multinational investment raises the national welfare in the host economy if the tariff imposed on imports is sufficiently large and the difference between domestic and foreign capital rental is sufficiently small.     

The consequences of labor market flexibility: Panel evidence based on survey data

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-1990. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long-run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence.     

A coalitional theory of unemployment insurance and employment protection

This paper examines the role of coalition formation in the empirically observed negative correlation between employment protection and unemployment benefit. We study an economy composed of four groups of agents (capitalists, unemployed people, low- and high-skilled workers), each one represented by a politician. Politicians first form political parties and then compete in a winner-takes-all election by simultaneously proposing policy bundles composed of an employment protection level and an unemployment benefit. We first show that, in the absence of parties (i.e., in a citizen-candidate model), low-skilled workers are decisive and support a maximum employment protection level together with some unemployment benefit. We then obtain that, under some conditions, allowing for party formation results in all policy equilibria belonging to the Pareto set of the coalition formed by high-skilled workers together with unemployed people. Policies in this Pareto set exhibit a negative correlation between employment protection and unemployment benefit.     

Trade, technology, and unemployment: the role of endogenous skill formation

Abstract .  This paper analyses trade in an asymmetric  2 × 2 × 2  world, where the two countries ('Europe' and 'America') differ in their preferences towards wage inequality. Fair wage considerations compress wage differentials in both countries. European workers are more averse to wage inequality, and Europe is characterized by lower wage differentials and higher unemployment. Allowing for endogenous skill formation, the effects of a globalization shock, global technological change, and a change in the educational capital stock on skill premia and employment levels are derived. In contrast to a model with exogenous factor supplies, international wage and unemployment differentials are affected by global shocks.     

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.     

Impact Of Tariff Reduction On Structural Employment In China: A Computable General Equilibrium Analysis

The paper studies the effect of tariff reduction on employment in China. Using a computable general equilibrium (CGE) analysis, a model simulates the structural adjustment in the Chinese economy as a result of tariff cuts and predicts their quantitative impacts on structural unemployment during the adjustment period. It is concluded that the structural unemployment in China caused by tariff reduction is not as serious as some have claimed. The technique of study on structural unemployment can be extended to other countries to analyze the impact of trade reform.     

Is trade liberalization a solution to the unemployment problem?

This paper examines how trade liberalization affects the growth rate of sectoral employment in developed and developing countries. The estimation results imply that trade openness in the form of higher trade volumes has not been successful in generating jobs in developing countries. The overall weak, negative employment response to trade volumes may be explained by the negative output response to trade openness in these countries. Our estimates also indicate that higher trade volumes have adverse effect on industrial employment in developed countries. Moreover, while they have positive effect on employment in industry and services in developing countries, trade barriers have adverse effect on employment growth in services for developed countries. Our overall results imply that while trade barriers have relatively little adverse effects and/or in some case a positive effect on employment both in developing and developed countries, higher trade volumes have an adverse effect on industrial employment in developed economies. Thus, trade openness is not in itself a solution to the unemployment problems of developing countries and yet it has not been the prime factor to blame for the lower employment levels in developed countries.     

Interest Rate Defenses of Currency Pegs

ABSTRACT

Reducing rigidity in labor markets is key to lowering unemployment. Theoretical models suggest that the impact of such reforms depends on the country-specific regulatory framework. We test this hypothesis by estimating the impact of changes in six categories of regulation conditional on the country-specific regulatory environment for 26 OECD countries. We overcome problems of modeling a large set of institutional interdependencies by applying a machine learning type model selection approach. We provide evidence for the existence of higher-order institutional interdependencies. We further document that especially for changes in employment protection and the unemployment benefit system the impact on unemployment is mixed across countries.