The Netherlands: An employment policy role model?

Conclusion While in recent years the level of social security benefits in the Netherlands has been reduced somewhat —whereby to some extent this involved the employers shouldering additional costs (e.g. for disability pensions) —the benefits for unemployment and other social bene-fits remain high in international comparative terms. Despite a slight decline in social benefits as a share of GDP, public sector spending as a whole is, at around 50%, slightly higher than in Germany, although the Netherlands has not had to cope with extraordinary burdens such as have resulted from German unification. The successes achieved by the Netherlands on the labour market have been exaggerated. Firstly, the real level of unemployment is likely to be actually rather high in international terms, at least once one dispenses with a narrow definition and takes account, in particular, of the large number of occupationally disabled. Secondly, the fall in the unemployment rate is far from spectacular. Although the increase in the number of wage and salary earners has been substantially higher in the Netherlands than in west Germany, this in no way represents a comparable increase in the volume of employment—measured in working hours—as the incidence of part-time employment has increased far faster there than in west Germany. The Netherlands has achieved-slightly-higher growth than west Germany. This success is largely due to a very moderate growth of wages and salaries, amounting to a real depreciation of the guilder against the D-Mark, an economic policy strategy that can be successful in a small country, but one which, if applied by a large country such as Germany, would merely initiate a beggar-thy-neighbour race to lower real exchange rates.     

Unit labour costs still higher in east than in west Germany

Conclusion The rapid wage growth in east Germany during the early years of German unification are a millstone around the neck of medium-term economic development in the new federal states. Because labour costs have raced ahead of productivity, unit labour costs have risen to a level substantially higher than that prevailing in the old federal states: there has been no improvement in the relationship between east and west German unit labour costs in recent years. Comparatively high wages at low productivity have led to an unfavourable profitability situation for many east German firms, which, in turn, has reduced investmen and slowed productivity growth. If firms in the new federal states are to break out of this vicious circle “it is essential that the level of collectively agreed wages does not rise for a number of years. Productivity growth would then create the scope for an improvement in profitability, which, in turn, is a necessary precondition for investment and the creation of competitive jobs… Only if a fundamental correction towards a relation (between labour costs and productivity) corresponding to that in west Germany is realised in east Germany can a self-sustained growth process be expected.”⁷ Yet in 1997 there is again no chance of a change of course of this nature.     

The global threat of deflation calls for swift interest rate cuts in Europe

Conclusions Given the serious crisis in Asia and evidence of its spreading to other developing and transition countries, the attempt by German economic policymakers to achieve faster economic growth and higher employment almost exclusively by means of successes on export markets appears likely to fail sooner than had been expected by the DIW⁵. The significance of domestic demand has been systematically underestimated in recent years. With the help of extremely low pay settlements, the D-Mark was devalued in real terms; this promoted exports, but at the same time led to growth losses in private consumption and investment that more than offset the gains in exports. On top of this German fiscal policy—as documented in the following report in this issue—has weakened domestic demand and investment activity. This strategy might have worked if a symmetrically oriented monetary policy had reacted to the deflationary trend inherent in pay settlements and the fiscal-policy stance by swiftly and significantly reducing interest rates. This did not happen. It was therefore inevitable that the crisis in sales markets made its full effects felt on economic growth. More seriously still, if cost deflation in Germany is not brought to an end in the coming year by a return to productivity-oriented wage settlements, it will pose a major threat to the European Monetary Union.⁶ If Germany pursues a beggar-thyneighbour policy in a Europe without exchange rates, this can only result in deflation and a downward economic spiral.⁷     

Gap in relative importance of service activities closed

Conclusion Overall it is evident that the relative importance of services and service activity trends in the USA and west Germany is very similar. In other words the activity structure in Germany is indeed “modern”. Also in highly productive areas of production, value adding largely takes the form of service activities. Thus the employment problem in Germany results not from outdated activity structures; the causes are rather those macroeconomic reasons to which the DIW has repeatedly drawn attention⁷. German economic policy must ensure that the framework of macroeconomic conditions is changed to allow jobs to be created. Whether these jobs are created in certain branches or activities is of secondary importance. Having said this, in Germany, too, it is to be expected that more than two out of every three new jobs created will be service jobs. Even so, a quarter of new jobs will be created in industry.     

MACROECONOMIC POLICY AND TRADE LIBERALIZATION: SOME GUIDELINES

Appropriate conduct of macroeconomic policy can play a crucialrole in the success of trade liberalization. At a given nominalexchange rate, a trade liberalization that significantly reducestariffs and quantitative restrictions on imports normally impliesa reduction in the general level of domestic prices and wages,especially in the import-competing sector. To diminish recessionaryeffects of domestic price and wage deflation, it is often appropriateto devalue a country's currency in conjunction with a majortrade liberalization. Monetary policy needs to be consistentwith exchange rare policy— avoiding both restrictivenessthat might induce recession and excessive ease that would fuelinflation and force future devaluations. Since trade liberalizationcan induce a short-run deterioration of the government's budgetposition, fiscal policy needs to remain restrained in orderto limit the dangers posed by large government deficits. Wagepolicy should be directed toward facilitating adjustments inrelative wage rates that accompany resource reallocations stimulatedby trade liberalization. Credit policy should assume that adequatecredit is available to finance expansion of export industriesand that difficulties experienced by import-competing enterprisesdo not threaten the financial system. Finally, government policyshould avoid large balance of payments deficits that createdoubt about the government's ability to maintain a liberal tradepolicy.      

Rational speculation and exchange rates

Models of exchange rates have typically failed to produce results consistent with the key fact that real and nominal exchange rates move in ways not closely connected to current (or past) macroeconomic variables. Models that rely on the same shocks to drive fluctuations in macroeconomic variables and exchange rates typically imply counterfactually-strong co-movements between them. We develop a model in which new information leads agents to change their rational beliefs about risk premia on foreign exchange markets. These changes in risk premia work through asset markets to cause real and nominal exchange rates to change without corresponding changes in GDP, productivity, money supplies, and other key macro variables.     

Evaluating the economic significance of downward nominal wage rigidity

The existence of downward nominal wage rigidity has been abundantly documented, but what are its economic implications? This paper demonstrates that, even when wages are allocative, downward wage rigidity can be consistent with weak macroeconomic effects. Firms have an incentive to compress wage increases as well as wage cuts when downward wage rigidity binds. By neglecting compression of wage increases, previous literature may have overstated the costs of downward wage rigidity to firms. Using micro-data from the US and Great Britain, I find that the evidence for the compression of wage increases when downward wage rigidity binds. Accounting for this reduces the estimated increase in aggregate wage growth due to wage rigidity to be much closer to zero. These results suggest that downward wage rigidity may not provide a strong argument against the targeting of low inflation rates.     

Optimal wage indexation and monetary policy in an economy with imported raw materials

An economy's openness from the input side has important effects on the optimal design of its macroeconomic policies. Given the exchange rate regime, the larger the share of imported raw materials in domestic production, the smaller the optimal degree of wage indexation to unanticipated inflation. Alternatively, given the wage indexation parameter, the larger the share of imported raw materials in domestic production, the smaller the optimal degree of foreign exchange intervention by the monetary authority (the more flexible the exchange rate).     

Taxes and stabilization in contemporary macroeconomic models

The role of proportional and procyclic labor income taxes for automatic stabilization with stochastic productivity is analyzed in a contemporary macroeconomic model based on imperfect competition. The importance of short-run nominal wage rigidity for the effectiveness of progressive taxes on labor income for stabilizing output and raising household welfare is examined in a model that yields complete analytical solutions with stochastic output shocks. Increasing the procyclicity of labor income tax rates raises welfare with and without rigid nominal wages in the model economy. With fully flexible prices and wages, a positive covariance between the distortionary tax rate and productivity reduces the volatility of production and employment. This effect disappears under nominal wage rigidity, although progressive taxation can still raise welfare by reducing the distortion caused by a proportional labor tax. With rigid nominal wages and flexible consumer goods prices, payroll taxes levied at rates that rise with output can serve as automatic stabilizers. JEL Code E62 · H20     

Are older workers overpaid? A literature review

It is widely believed that wage and productivity profiles of individual workers do not coincide at all ages. We give an overview of the theories which provide a rationale for this, and discuss the empirical literature. Human capital theories typically imply that wages rise with tenure, so that job reallocation at old age would imply a wage cut. Incentive theories typically imply that wages exceed productivity at the end of a worker’s career. Bargaining power of unions may also lead to ‘overpayment’ of older workers. Some general conclusions regarding the wages of older workers are formulated on basis of the authors’ reading of the empirical literature.     

Intraday periodicity, calendar and announcement effects in Euro exchange rate volatility

This paper provides an analysis of intraday volatility using 5-min returns for Euro-Dollar, Euro-Sterling and Euro-Yen exchange rates, and therefore a new market setting. This includes a comparison of the performance of the Fourier flexible form (FFF) intraday volatility filter with an alternative cubic spline approach in the modelling of high frequency exchange rate volatility. Analysis of various potential calendar effects and seasonal chronological changes reveals that although such effects cause deviations from the average intraday volatility pattern, these intraday timing effects are in many cases only marginally statistically significant and are insignificant in economic terms. Results for the cubic spline approach imply that significant macroeconomic announcement effects are larger and far more quickly absorbed into exchange rates than is suggested by the FFF model, and underscores the advantage of the cubic spline in permitting the periodicity in intraday volatility to be more closely identified. Further analysis of macroeconomic announcement effects on volatility by country of origin (including the US, Eurozone, UK, Germany, France and Japan) reveals that the predominant reactions occur in response to US macroeconomic news, but that Eurozone, German and UK announcements also cause significant volatility reactions. Furthermore, Eurozone announcements are found to impact significantly upon volatility in the pre-announcement period.     

Information Sharing and International Taxation: A Primer

The sharing between national tax authorities of taxpayer-specific information has emerged over the last few years as a—probably ‘the’—central issue on the international tax policy agenda. Yet this refocusing of the debate on international taxation—away from parametric tax coordination and towards strengthening information exchange—has gone largely unnoticed in the public finance literature. This paper gives an overview of this increasingly important area of international taxation, reviewing the key economic, legal, and practical concepts and issues bearing on the analysis and implementation of information exchange, and providing an account of recent policy initiatives and emerging theoretical insights. JEL Code: H77, H87, F42     

Incentives and Information Exchange in International Taxation

The exchange of taxpayer-specific information between national tax authorities has recently emerged as a key and controversial topic in international tax policy discussions, most notably with the OECD's harmful tax practices project and the EU's savings tax initiative. This paper analyzes the effects of information exchange and withholding taxes, recognizing that countries which agree to exchange information do not forfeit the ability to levy withholding taxes, and also focusing in particular on the effects of innovative revenue-sharing arrangements. Amongst the findings are that: (i) the transfer of withholding tax receipts to the residence country, as planned in the European Union, has no effect on equilibrium tax rates, but acts purely as a lump-sum transfer; (ii) in contrast, allocating some of the revenue from information exchange to the source country—counter to usual practice (though no less so than the EU agreement)—would have adverse strategic effects on total revenue; (iii) nevertheless, any withholding tax regime is Pareto dominated by information exchange combined with appropriate revenue sharing; and, in particular, (iv) sharing of the additional revenues raised from information provided, while efficiency-reducing, could be in the interests of large countries as a means of persuading small countries to provide that information voluntarily. JEL Code: H77, H87, F42     

Economic exposure and hysteresis: Evidence from German,Japanese, and U.S. stock returns

Real exchange rate changes reflect terms of trade changes and macroeconomic shocks in productivity, aggregate demand, and interest rates. We show that German, Japanese, and U.S. excess stock returns vary directly with changes in the real terms of trade as well as with exchange rate changes induced by the macroeconomic factors. These results suggest that economic exposure is a global phenomenon. Although German, Japanese, and U.S. firms appear to adjust costs and productivity in response to economic exposure, there are indications that firms in all three countries suffer from hysteresis, an effect persisting after the initial cause is removed.     

Learning and shifts in long-run productivity growth

An extensive literature has analyzed the macroeconomic effects of shocks to the level of aggregate productivity; however, there has been little corresponding research on sustained shifts in the growth rate of productivity. In this paper, we examine the effects of shocks to productivity growth in a dynamic general equilibrium model where agents do not directly observe whether shocks are transitory or persistent. We show that an estimated Kalman filter model using real-time data describes economists’ long-run productivity growth forecasts in the United States extremely well and that filtering has profound implications for the macroeconomic effects of shifts in productivity growth.     

Macroeconomic policies and performance in Latin America

This paper provides new evidence on macroeconomic policies and results in Latin America and the Caribbean. Results are: (i) credibility allows adoption of counter-cyclical macroeconomic policies; (ii) accuracy in meeting inflation targets depends on central bank independence and country risk; (iii) intermediate exchange rate (ER) regimes have become less persistent; (iv) ER regimes matter for inflation and growth; (v) real ER trends are not explained by productivity growth and supply reforms do not resolve real ER misalignments; (vi) financial integration has increased significantly; (vii) foreign shocks are a major growth determinant; and (viii) composition of foreign capital inflows matters for growth.     

Unemployment insurance: Risk sharing versus efficiency

Two models of spot labor markets are presented in which labor suppliers have heterogeneous attitudes towards effort and in which uncertainty prevails on labor productivity and growth. The problem of selecting efficient rules to manage unemployment insurance (UI) systems is considered. We show that there does not exist any system which combines an efficient allocation of labor with an efficient allocation of risks among employees, unemployed workers and capital-owners. Pareto-efficient policy rules are a best compromise between these two conflicting objectives. It implies that productive efficiency could be improved in periods of mass unemployment by reducing UI benefits. That would be at the expense of more inefficiencies in the sharing of macroeconomic risks. At the optimum, the UI benefit is positively correlated to growth and it is negatively correlated to labor productivity.     

The joint response of stock and foreign exchange markets to macroeconomic surprises: Using US and Japanese data

This paper investigates the joint response of stock and foreign exchange (FX) market returns to macroeconomic surprises, employing a system method of estimation that allows for the cross-country and cross-market interaction for asset returns and risk premia. Using US and Japanese data, we find that US stock markets are asymmetrically responsive to domestic developments in output growth and interest rates but are not influenced by macroeconomic surprises from Japan. The surprise in the FX market seems to affect stock markets in the US and Japan, respectively. In particular, we find that the interest rate surprise in the US and inflation surprise in Japan tend to overstate the impact that these surprises would have on the respective stock market. The impact of the surprises would appear smaller if macroeconomic developments induced by the FX market were incorporated into the model.     

Factors driving aggregate mortality rates in postwar Germany

Using German data over the period 1956–2006, this study provides a comprehensive empirical analysis of factors driving aggregate mortality rates over time. It differs from previous contributions in this field by simultaneously considering an extensive set of macroeconomic, socioeconomic, and ecological factors as explanatory variables. Our regression analysis shows that sex- and age-specific mortality rates vary substantially in their response to external factors. Strongest associations are found with changes in real GDP, flu epidemics, and the two lifestyle variables—alcohol and cigarette consumption—in both univariate and multivariate setups. Further analysis indicates that these effects are primarily contemporary, whereas other indicators, such as weather conditions, exert lagged effects. We derive optimal multivariate models for every age group that provide a good fit to the observed variation in annual mortality rates, and thereby confirm the relevance of the identified factors.     

No significant service gap between west Germany and the USA

Conclusions The analyses show that a significant “services gap” does not exist between west Germany and the USA. Such a gap is not even evident in the area of low-skill service activities, such as in catering, once the marginal employment relations — the importance of which is understated by the official statistics — are included. This finding invalidates the empirical basis for economic policy proposals for an expansion of employment in service branches as a way out of the employment crisis. It is evident that a solution to Germany's current employment problems can only be found in a strategy that increases the scope for employment at the macro-economic level, i.e. irrespective of sectoral developments and whatever the implications of this for the distribution of the various types of activity. Having said this, the heavy bias in the output structure of the German economy in favour of industrial output suggests that an additional employment potential does exist in services, especially personal services.