Wages,non-wage characteristics,and predominantly male jobs

This paper estimates the wage premium associated with working in predominantly male jobs. It also examines whether this wage premium is greater than the compensation workers demand for the less desirable non-wage characteristics of such jobs. The coefficients of the change in the proportion of men in an occupation on the change in wages for quits and layoffs provide opposing biased estimates of the wage premium; because workers who voluntarily quit move to better matches, but those that are laid off accept jobs from the representative distribution of job offers. Specifically, when the premium paid over- (under-)compensates for undesirable work characteristics, the quit estimate is a downward (upward) biased estimate of the wage premium, while the layoff estimate is biased upward (downward). Results from the U.S. National Longitudinal Survey of Youth (NLSY) and the U.S. Panel Study of Income Dynamics (PSID) indicate that: (1) the estimated bounds of the wage premium are large; and (2) the wage premium overcompensates for the non-wage characteristics of male jobs.     

What is the most flexible component of wage bill adjustment? Evidence from Belgium

This paper decomposes wage bill changes at the firm level into components due to wage changes, and components due to flows of employment. It relies on an administrative matched employer–employee dataset of individual earnings merged with firms' annual accounts for Belgium over the period 1997–2001. The results are in line with what one would expect in a downward wage rigidity environment. On average, wage bill contractions result essentially from employment cuts in spite of wage increases. Wage growth of job stayers is moderated but positive; and wages of entrants compared with those of incumbents are no lower. The labour force cuts are achieved through both reduced entries and increased exits, due to more layoffs, especially in smaller firms, and wider use of early retirement, especially in manufacturing. In addition, the paper points out the role of overtime hours, temporary unemployment and interim workers in adapting hours worked to economic circumstances.     

A tale of two correlations: Evidence and theory regarding the phase shift between the price level and output

We examine the relationship between the price level and output at business-cycle frequencies. In the postwar period, there is evidence of a phase shift between the price level and output. Such a phase shift is manifested in the price level being countercyclical and the inflation rate being procyclical or acyclical, depending on the detrending method used. Our examination takes three approaches. First, we apply bootstrapping methods to characterize the two correlations, though the methodology could easily be extended to any set of facts. Second, we specify a model economy with forecast heterogeneity, showing numerically that this model economy can match the observed pair of correlations. Third, we apply robust control theory, deriving conditions in which the price level is countercyclical and the inflation rate is procyclical.     

Dismissals and match-specific rents

Labor contracts that result in dismissals are quite common in the real world. The question that arises is why employers do not just offer reduced wages instead of asking workers with low realized productivity to leave. This paper argues that such behavior can be explained by workers' understandable unwillingness to agree to contracts that an employer will not have an incentive to honor in the future. Specifically, we construct a matching model in which the employer and the worker are both uncertain about the value the other places on the match. Because the worker's match-specific productivity is the employer's private information, a commitment to pay a wage equal to the worker's value of marginal product is not enforceable. In the absence of a wage guarantee, the employer will offer retained workers wages below their value of marginal product, which causes quits to be inefficiently high. The employer can reduce quits by contractually promising a guaranteed wage to retained workers. Although this will lead to some involuntary dismissals, the loss from dismissals will be less than the gain from lower quits if the wage guarantee is not too high.     

Do Good Institutions Promote Countercyclical Macroeconomic Policies?

The literature has argued that developing countries are unable to adopt countercyclical monetary and fiscal policies due to financial imperfections and unfavourable political‐economy conditions. Using a world sample of up to 112 industrial and developing countries for 1984–2008, we find that the level of institutional quality plays a key role in countries’ ability and willingness to implement countercyclical macroeconomic policies. Countries with strong (weak) institutions adopt countercyclical (procyclical) macroeconomic policies, reflected in extended monetary policy and fiscal policy rules. The threshold levels of institutional quality at which policies are acyclical are found to be similar for monetary and fiscal policy.     

Real and nominal wage rigidities in collective bargaining agreements

An earlier study of wage agreements, reached in the Canadian unionized sector between 1976–99, found that wage adjustment is characterized by downward nominal rigidity and significant spikes at zero. We extend this earlier approach to encompass the possibility of real as well as nominal wage rigidity. The addition of real wage rigidity variables enhances earlier results and suggests that real rigidity increases significantly the mass in the histogram bin containing the mean anticipated rate of inflation, as well as in adjacent bins. Downward nominal wage rigidities and spikes at zero remain important.     

The Wage Inflation‐Unemployment Curve at the Macroeconomic Level

Based on the reduced form New Keynesian Wage Phillips Curve, we estimate wage rigidity and indexation at the aggregate level in several advanced countries for the 1985–2014 period. We document that the wage setting process is heterogenous among our sample of countries: nominal wage rigidities are more important in the United States, while wage indexation is dominant in European Countries. We also present evidence that indexation to past inflation has decrease as inflation stabilizes at lower levels. In addition, our results suggest that wage rigidity is not linked to the institutional environment at the macroeconomic level. Finally, we show that there is significant time variation in the estimated coefficients on the implied equation that is usually not taken into account in the theoretical literature.     

Costly external finance and labor market dynamics

We study the role of agency frictions and costly external finance in cyclical labor market dynamics, with a focus on how credit-market frictions may amplify aggregate TFP shocks. The main result is that aggregate TFP shocks lead to large fluctuations of labor market quantities if the model is calibrated to the empirically observed countercyclicality of the finance premium. A financial accelerator mechanism thus amplifies labor market fluctuations by rendering rigidity in real wage dynamics. In contrast, if the finance premium is procyclical, which the model can be parameterized to accommodate, amplification is absent, and labor-market fluctuations display the Shimer (2005) puzzle.     

On the cyclicality of unemployment: Resurrecting the participation margin

This paper considers a real business cycle model with search frictions in the labor market and labor supply which is elastic along the participation margin. Previous authors have found that such models generate counterfactually procyclical unemployment and a positively sloped Beveridge curve. This paper presents a calibrated model which succeeds at generating countercyclical unemployment and a negatively sloped Beveridge curve, despite the presence of a participation margin.     

The cyclicality of effective wages within employer-employee matches in a rigid labor market

This study analyzes real wage cyclicality for male full-time workers within employer-employee matches in Germany over the period 1984-2004. Five different wage measures are compared: the standard hourly wage rate; hourly wage earnings including overtime and bonus pay; the effective wage, which takes into account unpaid overtime; and monthly earnings, with and without additional pay. None of the hourly wage measures exhibits cyclicality except for the group of salaried workers with unpaid overtime. Their effective wages show a strongly procyclical reaction to changes in unemployment. Despite acyclical wage rates, salaried workers without unpaid overtime experienced procyclical earnings movements if they had income from extra pay. Monthly earnings were also procyclical for hourly paid workers with overtime pay. These findings suggest that cyclical earnings movements are generated by variable pay components, such as bonuses and overtime pay, and by flexible working hours. The degree of earnings procyclicality revealed for the German labor market is comparable to the United States.     

Disaster risk and preference shifts in a New Keynesian model

In RBC models, disaster risk shocks reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents’ preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian model with such a small but time-varying probability of “disaster”. We show that price stickiness, combined with an EIS smaller than unity, restores procyclical consumption and wages, while preserving countercyclical risk premia, in response to disaster risk shocks. The mechanism then provides a rationale for discount factor first- and second-moment (“uncertainty”) shocks.     

By force of demand: Explaining cyclical fluctuations of international trade and government spending

This paper explores the role of demand shocks, as an alternative to productivity shocks, in driving both domestic and international business cycles within the international real business cycle (IRBC) framework. In addition to those well-documented domestic business cycle fluctuations (e.g., the volatility and cyclicality of output, consumption, investment, labor hours, and labor productivity) and international business cycle properties (e.g., the countercyclical net export and the comovement puzzle), this paper focuses on two additional stylized facts in the industrialized countries: the procyclical trade openness (the GDP fraction of trade volume) and the countercyclical government size (the GDP fraction of government spending). Using a parsimonious dynamic stochastic general equilibrium model, we show that the model׳s predictions under productivity shocks are not consistent with these facts. Instead, a demand-shock-driven model replicates the above facts while matching other domestic and international business cycle properties. An estimated version of the model confirms the quantitatively important impacts of demand shocks.     

The time-varying correlation between output and prices in the United States over the period 1800–2014

In this study, we examine the time-varying correlations between output and prices, while controlling for the impact of the monetary policy stance and output and inflation uncertainties over the period 1800–2014. The results of the empirical analysis reveal that the dynamic correlations of output and prices were typically negative, suggesting a countercyclical behaviour of prices, apart from the early 1840s and from the beginning until the middle of the 20th century, when the correlation was positive, indicating a procyclicality of prices. A historical decomposition analysis based on a sign-restricted structural vector autoregressive model is able to relate the procyclical and countercyclical behaviour to the predominance of aggregate supply and aggregate demand and/or monetary policy shocks, respectively. Moreover, inflation uncertainty (monetary policy stance) was found to have a positive (negative) effect on inflation over the last 215 years.     

The cyclical nature of markups in Canadian manufacturing: A production theory approach

In this paper the effects of cost and demand characteristics on the magnitude and cyclical behaviour of markups in Canadian manufacturing are measured within a production theory framework. Price to marginal cost ratios for various manufacturing industries are computed, and the impact art their secular and cyclical trends from changes in capacity utilization, scale economies, variable input prices, import competition, unemployment and other exogenous market and technological determinants are explored using adjusted markup indexes and elasticities. The measured price margins seem weakly procyclical. Further, evaluation of the determinants of these cycles suggests that the procyclical nature of markups is primarily related to exogenous factors affecting costs such as energy price ‘shocks’, and that cost characteristics underlying scale economies provide a countercyclical influence that counteracts the profitability arising from markups.     

Recall bias in the displaced workers survey: Are layoffs really lemons?

This paper examines how the extent of recall bias in the Displaced Workers Surveys affects the often-cited empirical results found by Gibbons and Katz [Gibbons, R., Katz, L.F., 1991. Layoffs and lemons. Journal of Labor Economics 9 (4), 351−380] for the lemons effect of layoffs. Their finding that workers displaced by layoffs experience larger wage losses than do those displaced by plant closings is not due to the stigma attached to the layoff events. Rather it partly stems from recall bias in the 1984 and 1986 DWS, but mostly reflects the fact that workers displaced by layoffs have significantly higher predisplacement wage-tenure profiles than do those displaced by plant closings, while there is no such difference in postdisplacement wage-tenure profiles. A similar analysis using the 2000 and 2002 DWS shows that predisplacement wage losses are not different between workers displaced by layoffs and those displaced by plant closings.     

Do labor market institutions matter for business cycles?

Using panel data of 19 OECD countries observed over 40 years and data on specific labor market reform episodes we conclude that labor market institutions matter for business cycle fluctuations. Spearman partial rank correlations reveal that more flexible institutions are associated with lower business cycle volatility. Turning to the analysis of reform episodes, wage bargaining reforms increase the correlation of the real wage with labor productivity and the volatility of unemployment. Employment protection reforms increase the volatility of employment and decrease the correlation of the real wage with labor productivity. Reforms reducing replacement rates make labor productivity more procyclical.     

On recalls, layoffs, variable hours, and labor adjustment costs

The paper analyzes the employment policy of a firm that can vary both hours and the level of employment. The analysis differs from previous work in the adjustment cost literature in that the firm is able to change its employment not only through hires, layoffs, and quits, but also by recalls of employees who were previously laid off. Thus, we introduce the possibility of the firm inventorying the labor input. It is shown that this labor inventory potential is necessary if the firm is to ever lay off workers. Further, it is demonstrated that linear rather than strictly convex adjustment costs are then required if the firm is to always recall employees who were previously laid off prior to hiring new workers.     

Entry‐Timing Advantages in Renewable Natural Resources Industries

In this paper, we explore the conditions of entry‐timing advantages in renewable natural resource industries. Drawing from behavioural theory of the firm, we classify firms in two groups depending on the different heuristics used to make entry decisions when facing the cyclical endogenous nature of these industries: crowd firms are procyclical, making decisions based on the current phase of the industry cycle, whereas anti‐crowd firms follow a countercyclical strategy, making uncertain, and risky decisions by estimation of the next phase of the cycle. Therefore, anti‐crowd firms anticipate the deployment of resources each cycle, potentially gaining entry‐timing advantages beyond those provided by traditional competitive isolating mechanisms. Through a mathematical simulation of a performance feedback model, we reveal that the entry‐timing advantage of the anti‐crowd group becomes possible when the rivalry in the industry and the price sensitivity of competitors are high, and when the time required to deploy the resources is short.     

How do European firms adjust their labour costs when nominal wages are rigid?

Although workers' nominal wages are seldom cut, firms have multiple options available if they require adjustments in their wage bills. We broaden the analysis of relative (in)flexibility in labour costs by investigating the use of other margins of labour cost adjustment at the firm level beyond base wages. Using data from a unique survey, we find that European firms make extensive use of other components of compensation to adjust the cost of labour. Interestingly, firms facing base wage rigidity are more likely to use alternative margins of labour cost adjustment; therefore there appears to be some degree of substitutability between wage flexibility and the flexibility of other cost components. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by unionisation and firm and worker characteristics.     

Verifiable wage offers and recontracting: effect on wage and consumption profiles

This paper analyzes the effect of recontracting and matching verifiable wage offers on the intertemporal structure of contract wage and consumption profile for a two-period economy. A contract firm provides specific training for a worker during the first period, which increases his productivity if he stays in the second period, but the worker may quit to accept an alternative wage offer after a successful search. Wage offers are private to the worker but can be presented to the contract firm for matching. This paper shows that when capital markets are imperfect and wage offers are verifiable, the contract firm recontracts and matches any wage offers the worker receives up to the second-period productivity. The ex ante contract wage profile will be flat. Inefficient quits will be eliminated and there will be complete ex ante consumption smoothing. It is significant to note that the result of rising wage profile derived in numerous contract models is fragile with respect to assumptions on mechanism of interfirm labor mobility.