A Union-bashing Model of Inflation Targeting

This paper shows that in an open two‐sector economy, centralization of wage setting may be important in determining the employment (and welfare) effects of different monetary targets. By disciplining unions in the sectors open to international trade, exchange rate targeting yields higher employment than inflation targeting when wage‐setting is more centralized in the open sector than in the shielded sector. When wage‐setting centralization is higher in the shielded sector, we show that general price‐level inflation targeting, while better than exchange rate targeting, is inferior to an inflation target that focuses more heavily on shielded sector prices.     

Openness, centralized wage bargaining, and inflation

This paper develops a model of an open economy containing both sectors in which wages are market-determined and sectors with wage-setting arrangements. A portion of the latter group of sectors coordinate their wages, taking into account that their collective actions influence the equilibrium inflation outcome in an environment in which the central bank engages in discretionary monetary policymaking. Key predictions forthcoming from this model are (1) increased centralization of wage setting initially causes inflation to increase at low degrees of wage centralization but then, as wage centralization increases, results in an inflation drop-off; (2) a greater degree of centralized wage setting reduces the inflation-restraining effect of greater central bank independence; and (3) increased openness is more likely to reduce inflation in nations with less centralized wage bargaining. Analysis of data for seventeen nations for the period 1970–1999 provides generally robust empirical support for all three of these predictions.     

Excess supply equilibria

This paper addresses a fundamental problem in economic theory: How can there be equilibria of the economic system where some commodity is in excess supply, yet that commodity's relative price shows no tendency to fall? Of course, the principal example of such a phenomenon is an economy experiencing a prolonged period of involuntary unemployment of the labor force during which there is no significant change in the real wage.In the following pages, I shall describe a two-commodity, general equilibrium model that has a continuum of unemployment equilibria, one for any given unemployment rate. The important feature of this model is that workers establish their wage rates in an attempt to maximize expected utility. The information upon which these wage setting decisions are based is provided by actual labor market transactions.Despite the voluntary nature of the wage setting decision, I shall argue that each equilibrium of this economy exhibits involuntary unemployment in the Keynesian sense. For there will always be another equilibrium with a lower real wage, a higher level of employment, and at which (at least when workers are risk neutral) each worker achieves a higher level of expected utility.     

Employment and Wages in the Private and Local Government Sectors in a Centralized Fiscal System

This paper discusses the interaction between the local government and private sector in an institutional context consistent with a centralized fiscal system. Under decentralized wage setting in the private sector, the effects of shocks in the two sectors depend on whether private and local public goods are substitutes or complements in the union utility function. Higher wage markup in the local government sector unambiguously decreases government output while the effect on private sector employment is ambiguous. Higher income taxes have ambiguous effects on local government output. Shocks in the private sector can be reinforced through feedback effects from the local government sector. A shift from decentralized to centralized wage setting in the private sector reduces wages and increases employment in both sectors.     

ENVIRONMENTAL POLICY AND LABOUR MARKET IMPERFECTION

This paper will set up a general equilibrium model with a distorted labour market to explore the effects of an environmental tax and union bargaining power on formal employment and the informal competitive wage. We find that when the government raises the environmental tax, both formal employment and informal competitive wage would fall. In addition, we confirm that a policy of labour market reform would increase both formal employment and the informal competitive wage.     

Coalitional bargaining games with random proposers: Theory and application

We consider a non-cooperative coalitional bargaining game with random proposers in a general situation for which players differ in recognition probability and time preference. We characterize an efficient equilibrium as the generalized Nash bargaining solution that belongs to the core. The model is applied to wage bargaining between an employer and multiple workers. Although involuntary unemployment may occur in equilibrium, full employment emerges as players become sufficiently patient.     

A Schumpeterian North–South Growth Model of Trade and Wage Inequality*

The paper presents a dynamic general‐equilibrium model of interindustry North–South trade that is used to analyze the effects of trade liberalization on the Northern wage distribution. Both countries have a low‐tech sector where consumer goods of constant quality are produced by use of unskilled labor. The North also has a high‐tech sector that employs skilled labor and features a quality‐ladder model structure with endogenous growth. Both innovation and skill acquisition rates are endogenously determined. In a balanced trade equilibrium, it is found that Southern‐originated (Northern‐originated) trade liberalization leads to an increase (decrease) in Northern wage inequality both between skilled and unskilled workers and within the group of skilled workers. The endogenous change in the Southern terms of trade determines the direction of change in unskilled wages in both the North and the South.     

A Directed Search Model of Inequality with Heterogeneous Skills and Skill–Biased Technology

In this paper I analyse the directed search/matching problem in an economy with heterogeneous skills and skill–biased technology. A unique symmetric equilibrium exists and is socially efficient. Matching is partially mixed in the equilibrium. A high–tech firm receives both skilled and unskilled applicants with positive probability, and favours skilled workers, while a low–tech firm receives only unskilled applicants. The model generates wage inequality among identical unskilled workers, as well as between–skill inequality, despite the fact that all unskilled workers perform the same task and have the same productivity in the two types of firms. Inequality has interesting responses to skill–biased technological progress, a general productivity slowdown, and an exogenous increase in the skill supply elasticity.     

AN EQUILIBRIUM SEARCH MODEL WHEN FIRMS OBSERVE WORKERS' EMPLOYMENT STATUS*

This article considers an equilibrium search model, where firms post wages using information on workers' employment status. Earnings differentials between workers of different employment statuses are driven by firms' ability to discriminate workers' reservation wages. I study how these wage policies depend on firms' and workers' characteristics, and how these policies affect the wage distribution. The model delivers new predictions for the amount of wage dispersion that can be generated with search models and provides a better representation of the left tail of the wage distribution in the presence of a legal minimum wage than standard equilibrium search models.     

Capital tax,minimum wage,and labor market outcomes

Often an increase in the minimum wage is accompanied by a reduction in the capital tax. This paper analyzes the effects of interactions between the minimum wage and the capital tax in the general equilibrium framework. The analysis is conducted in an inter-temporal search model in which firms post wages. A (binding) minimum wage provides a lower support for the distribution of wages. The paper finds that the interaction of these two policy instruments significantly modify labor market outcomes and welfare cost. In the presence of a binding minimum wage, a decrease in the capital tax leads to an increase in wage dispersion. In contrast, when it is not binding, a lower capital tax may reduce the dispersion in wages. A binding minimum wage magnifies the positive effects of a lower capital tax on labor supply, employment, and output. It also enhances the welfare cost of capital tax. A policy change which involves an increase in the minimum wage and a fall in the capital tax such that employment level remains constant increases welfare and output.     

Employment gains from minimum‐wage hikes under perfect competition: A simple general‐equilibrium analysis

Contrary to conventional wisdom, higher minimum wages may lead to greater levels of employment under perfect competition. We demonstrate this possibility in a simple general‐equilibrium model of involuntary unemployment, with two goods produced by two factors and consumed by two representative households. Within our model, hiking a minimum wage redistributes income between heterogeneous consumers. This redistribution may create an excess demand for the labor‐intensive good, and hence increase total employment to restore equilibrium, despite the fact that every firm becomes less labor intensive.     

Union Wage Setting and Capital Income Taxation in Dynamic General Equilibrium

This paper concerns the effects of capital income taxation in a dynamic general equilibrium framework with union wage setting, when households face taxes related to both labor and capital. One purpose is to characterize the general equilibrium solution. Another is to study the effects of increased capital income taxation – in terms of the responses in real wages, employment, capital stock, output and consumption – and relate these behavioral responses to the overall tax structure. We also derive a cost–benefit rule for the purpose of analyzing the welfare effects of a small shift from labor income taxation to capital income taxation.     

Overseas Employment and Remittances to a Dual Economy

Overseas employment has become more commonplace, and remittances have increased in similar proportions. For poor countries, remittances often substantially influence domestic expenditures and real exchange rates. We study overseas employment, remittances and domestic underemployment in a simple general equilibrium model with a non-traded good and minimum wage. The influence of population growth, rural productivity, and family altruism are examined. If remittances per migrant exceed domestic productivity then multiple equilibria may occur exhibiting high or low overseas employment. We discuss how the equilibrium with highest overseas employment conditionally Pareto dominates the other equilibria, and analyse policy co-ordination.     

Endogenous wage bargaining institutions in oligopolistic sectors

Summary. This paper explores the endogenous emergence of wage bargaining institutions in a union-oligopoly framework. Technological asymmetries among firms are shown to be the driving force for the emergence of alternative wage bargaining centralization structures that are observable in real life. As wage deals at the sector-level obtain the consensus of all unions and the efficient firms, a regulator has an incentive to authorize those deals by activating/establishing a Minimum Sectoral Wage Institution(MSWI). If productivity differences are high enough, wage setting above the established wage floor may subsequently occur in efficient firms. Otherwise, a completely centralized wage bargaining structure emerges and the sector-level wage deal is simply confirmed as the firms wage rate. If, however, productivity asymmetries are rather insignificant, firms and unions have conflicting interests and a completely decentralized wage bargaining regime prevails in equilibrium.Received: 17 December 2001, Revised: 9 June 2003, JEL Classification Numbers: J50, J31, L13.Correspondence to: Emmanuel PetrakisParticular appreciation is expressed to an anonymous referee who has greatly helped us to improve our work upon an earlier draft of this paper. We also wish to thank T. Kollinzas, J. Padilla, H. Bester, J. Sakovics, K. Uwe-Kühn, J. J. Dolado, J. L. Ferreira, A. Matsui and C. Martinelli for their helpful comments and suggestions.     

International outsourcing when labour markets are unionized

Abstract. We consider the implications of international outsourcing in a simple general equilibrium model where the wage rate is the outcome of negotiations between a firm and a trade union. The effects of potential, but non‐realized, international outsourcing, is a reduction in the wage rate and an increase in employment. Aggregate welfare increases, but the trade union becomes worse off while owners of capital become better off. Realized international outsourcing gives rise to an increase in the wage rate and a reduction in employment. Aggregate welfare decreases, but the trade union becomes better off, while owners of capital become worse off.     

Monetary regimes and the co-ordination of wage setting

A recent literature argues that a strict monetary regime may reduce equilibrium unemployment by disciplining wage setters, as wage setters abstain from raising wages to avoid a monetary contraction. However, in this literature the wage setters are assumed not to co-ordinate their wage setting. The present paper argues that precisely because a strict monetary regime may discipline the unco-ordinated wage setting, thus lowering unemployment in the unco-ordinated outcome, it also reduces wage setters’ incentives to co-ordinate. It is shown that an accommodating monetary regime may reduce equilibrium unemployment, via the strengthening of the wage setters’ incentives to co-ordinate.     

Relative wage concern: the missing piece in the contract multiplier?

Recent research has cast serious doubts on the explanatory power of staggered wage/price setting to account for both output and inflation persistence following money shocks. This paper extends a dynamic general equilibrium model with wage staggering by incorporating relative wage concern on the part of workers. In sharp contrast to previous analyses, in this model both output and inflation dynamics exhibit substantial persistence. Moreover, persistence results hold for a wide range of parameterisations. Our results suggest that relative wage concern may be the missing piece in the money shock persistence puzzle.     

Extending working hours: why not work 42 h rather than 38?—a CGE analysis for Germany

Faced with a record level of unemployment, the present debate in Germany is to extend the weekly hours of work. In this paper the employment effects of an economy-wide increase in weekly hours are quantified on the basis of a computable general equilibrium model for different specifications of the wage setting rule and the use of additional policy-induced public income. The simulation results back the argument of the opponents of longer working time that not more jobs will be created. However, when the higher tax revenues from GDP growth are used to reduce social security contributions, then the claim of the proponents that more jobs will be created can be supported.     

How relevant are nominal contracting schemes for monetary policy?

Due to the scarcity of pertinent evidence, there is currently no general agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, the ranking of the welfare costs associated with alternative wage and price setting schemes is robust to changes in the monetary policy rule, and the ranking of the welfare costs associated with alternative monetary policy rules is robust to changes in the wage and price setting scheme. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes.     

Wage Bargaining Versus Efficiency Wages: A Synthesis

We construct a model integrating the efficiency wage model of Shapiro–Stiglitz (1984) (SS), with an individual wage bargaining model in the Diamond–Mortensen–Pissarides (DMP) tradition where firms and workers form pairwise matches. We show that when workers may threaten to shirk on the job and there is individual wage bargaining, the wage is always higher and employment lower than in either the SS model, or the (appropriately modified) DMP model. When firms determine workers' efforts unilaterally, efforts are set inefficiently low in the SS model. In the bargaining model, effort is higher, and is first best when the worker non–shirking constraint does not bind. The overall equilibrium allocation may then be more or less efficient than in the SS model, but is always less efficient than in a pure bargaining model with no moral hazard.