Dismissal conflicts and unemployment

We analyse the institutional sources of dismissal conflicts when workers’ effort is not perfectly observable. We build an efficiency wage model with firing costs to capture their effect on employment through wages. In this context, whenever there is a dismissal, a double moral hazard problem can arise. Resolution of this problem by a third party will be imperfect due to asymmetric information. In turn, disciplinary dismissals will not be costless and firing costs will have a negative effect on aggregate employment. The solution to this problem does not necessarily imply the elimination of firing costs.     

Are judges biased by labor market conditions?

When a firing litigation is taken to court, only the characteristics of the employee's misconduct should be relevant for the judge's decision. Using detailed data from an Italian bank and aggregate macro data, this paper shows that, instead, local labor market conditions influence the court's decision: The same misconduct episode may be considered sufficient for firing in a tight labor market but insufficient otherwise. We reach this conclusion after taking carefully into consideration the non-random selection of firing litigations for trial. Although these results refer to the specific situation considered, they raise more general issues. For macroeconomists they suggest that higher unemployment rates may increase firing costs via the effect on courts’ decision criteria; thus, the real extent of firing rigidities cannot be assessed without considering the role of courts. For labor law scholars, these findings are important because, following traditional principles, the law should be applied in the same way for all citizens and over the entire national territory.     

Estimating labour market transitions and continuations using repeated cross sectional data

This paper proposes a population cohort approach for estimating labour market continuations (or transitions) using repeated cross sectional data. This approach allows for the construction of consistent standard errors that account for the full variability of cross sectional data.     

Incentives in academic tenure under asymmetric information

This paper examines the incentives in academic tenure under asymmetric information where neither types nor actions of the agents are observable. The different contractual forms are compared, including short-term non-tenured contract and tenure contract with or without probationary period. It is shown that tenure track may help reduce information rent for the department in the situation where a smaller portion of high productive researchers are entitled to undertake very costly and time-consuming research project with a high potential value. However, when the probationary period cannot efficiently screen out the low productive researchers, providing both short-term non-tenured contract and tenure contract without probationary period or merely providing short-term non-tenured contract will be more likely taken by department. Therefore, the coexistence of different contractual forms in higher educational system, including the growing use of non-tenure track in some academic sectors can be economically explained.     

Transfer fee regulations in European football

We analyze the impact of three different transfer fee systems on payoffs, contract lengths, training and effort incentives in European football. The different regimes, being used until 1995 (“pre-Bosman”), currently in use (“Bosman”), and recently approved (“Monti”) differ with respect to the transfer fee an initial club is entitled to depending on whether a player has a valid contract or not. We show that the different systems differ only with respect to the contract length if the contract which maximizes the expected joint surplus of the initial club and the player is feasible under each system. Otherwise, regime P is strictly dominated by regime B in terms of expected social welfare. Regime M leads to higher effort but lower incentives to invest in training compared to system B.     

A theory of rational marriage and divorce

Despite high rates of cohabitation before marriage, and considerable efforts invested in the search for a life partner, a high number of marriages end in divorce. This paper develops a model of household formation and dissolution in which it may be rational for individuals to marry, fully anticipating that they will subsequently divorce. Economies of scale associated with living as a couple rather than in two separate households provide an incentive to marry; problems with free riding in the provision of household collective goods may lead to divorce. Marriages which involve partners who are similar, in tastes or in their productive capacities, and in which private goods are equally shared, are the most likely to be stable. In contrast, marriages which involve very disparate partners, or which share the fruits of market labor very unequally between the partners, are more likely to be shortlived and end in divorce.     

A portfolio model of capital flows to emerging markets

Since the crises of the late 1990's, most emerging market economies have built up substantial positive holdings of US dollar treasury bills, while at the same time experiencing a boom in FDI capital inflows. This paper develops a DSGE model of the interaction between an emerging market economy and an advanced economy which incorporates two-way capital flows between the economies. The novel aspect of the paper is to make use of new methods for analyzing portfolio choice in DSGE models. We compare a range of alternative financial market structures, in each case computing equilibrium portfolios. We find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital (FDI) can achieve a considerable degree of international risk-sharing. This risk-sharing can be enhanced by a more stable monetary policy in the advanced economy.     

Employment protection reform in search economies

The design of employment protection legislation (EPL) is of particular importance in the European debate on the contours of labor-market reform. In this article we appeal to an equilibrium unemployment model to investigate the virtues of EPL reform which reduces the red tape and legal costs associated with layoffs and introduces a U.S.-style experience-rating system, which we model as a combination of a layoff tax and a payroll subsidy. The reform considered shows that it is possible to improve the efficiency of employment protection policies without affecting the extent of worker protection on the labor market. These results are consistent with the conventional wisdom that experience rating is desirable, not only as an integral component of unemployment-compensation finance, as most studies acknowledge, but also as part and parcel of a virtuous EPL system.     

Termination of dynamic contracts in an equilibrium labor market model

In an equilibrium model of the labor market, workers and firms enter into dynamic contracts that can potentially last forever, but are subject to optimal terminations. Upon termination, the firm hires a new worker, and the worker who is terminated receives a termination contract from the firm and is then free to go back to the labor market to seek new employment opportunities and enter into new dynamic contracts. The model permits only two types of equilibrium terminations that resemble, respectively, the two kinds of labor market separations that are typically observed in practice: involuntary layoffs and voluntary retirements. The model allows for the simultaneous determination of a large set of important labor market variables including equilibrium unemployment and labor force participation. An algorithm is formulated for computing the model's equilibria. I then simulate the model to show quantitatively that the model is consistent with a set of important stylized facts of the labor market.     

Alternative interpretations of hours information in an econometric model of labour supply

This paper examines the labour supply behaviour of married women in France. A sequence of models is specified and estimated which incorporate different amounts of information on observed weekly hours. In all models the distinction is drawn between search and non-participation among non-workers. We provide extensive specification diagnostics, including Heckman-Andrews tests, as well as Hausman tests for the comparison of different handlings of the hours information. It turns out that distinguishing between part-time, full-time and long hours gives virtually the same results as treating observed hours as reflecting desired hours.     

Efficiency of two sided investments in an equilibrium unemployment framework

This paper investigates the efficiency of investments by firms and workers in a matching model with high- and low-productivity jobs. Search is sector specific and random within sectors. Search frictions and ex-post bargaining imply that wage inequality arises as a result of the difference in investment costs between the sectors. The efficiency properties of the equilibrium are analyzed under the particular division in bargaining proposed by Hosios (1990). The conclusion is that the equilibrium is inefficient, with a too low fraction of workers and a too high vacancy-unemployment ratio in the high-productivity sector. The opposite happens in the low-productivity sector.     

A general equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market

An optimizing model of a small open emerging market economy (SOEME) with dualistic labor markets and two types of consumers, delivers a tractable model for monetary policy. Differences between the SOEME and the SOE are derived. Parameters depend on features of the labor market and on consumption inequality, and affect the natural interest rate, terms of trade and potential output. The supply curve turns out to be flatter and more volatile, with a larger number of shift factors, including policy-determined terms of trade. A simple basic version of the model is simulated in order to compare different policy targets in response to a cost shock. Flexible domestic inflation targeting gives the lowest volatility although there are trade-offs. Exchange rate volatility is relatively lower but still makes a major contribution to controlling inflation. Flexible CPI inflation targeting performs better when combined with some kind of managed floating. Inflation targeting has to be flexible. With more backward-looking behavior the policy response to a shock is reduced.     

MONEY DEMAND STABILITY AND INFLATION PREDICTION IN THE FOUR LARGEST EMU COUNTRIES

In this paper, we analyze the money demand functions of the four largest EMU countries and of the four-country (EMU-4) aggregate. We identify reasonable and stable money demand relationships for Germany, France and Spain as well as the EMU-4 aggregate. For the case of Italy, results are less clear. From the estimated money demand functions, we derive both EMU-4 and country-specific measures of money overhang. We find that the EMU-4 overhang measure strongly correlates with the country-specific measures, particularly since the start of EMU, and is useful to predict country-specific inflation. However, it generally does not encompass country-specific money overhang measures as predictors of inflation. Hence, aggregate money overhang is an important, but by far not an exhaustive, indicator for the disaggregate level.     

Global labour markets,return, and onward migration

Abstract. There is increasing evidence that international migration is characterized by frequent return and onward migration. This has important consequences for the contribution of immigrants to the economy of the host country. Lack of longitudinal data has prevented much analysis of how frequently international migration involves a sequence of location decisions or how long the typical migrant stays in a host country. A newly available longitudinal data set covering all immigrants to Canada since 1980 provides the opportunity to address these issues. The results show that a large fraction of male immigrants who are of working age, especially among skilled workers and entrepreneurs, are highly internationally mobile.     

Von Neumann-Morgenstern stable sets in matching problems

The following properties of the core of a one-to-one matching problem are well-known: (i) the core is non-empty; (ii) the core is a distributive lattice; and (iii) the set of unmatched agents is the same for any two matchings belonging to the core. The literature on two-sided matching focuses almost exclusively on the core and studies extensively its properties. Our main result is the following characterization of (Von Neumann-Morgenstern) stable sets in one-to-one matching problems. We show that a set V of matchings is a stable set of a one-to-one matching problem only if V is a maximal set satisfying the following properties: (a) the core is a subset of V; (b) V is a distributive lattice; and (c) the set of unmatched agents is the same for all matchings belonging to V. Furthermore, a set is a stable set if it is the unique maximal set satisfying properties (a), (b), and (c).     

Shirking in a monetary business cycle model

Abstract .  This paper investigates whether a limited participation model with imperfectly observed effort can reproduce the economy's responses to a monetary policy shock without appealing to high labour supply elasticities or high markups. The results demonstrate that the presence of imperfectly observed effort, in combination with the limited participation assumption, allows the model to account for the presence of involuntary unemployment, nominal wage rigidity, and the observed responses to monetary policy shocks.     

Tenure, business cycle and the wage-setting process

We analyze the interaction between job tenure and external labor market conditions in wage determination. First, we introduce a model that combines job matching with business-cycle effects. As the employment relationship progresses, the worker appropriates a portion of the value of the match-specific human capital she accumulates, gradually becoming shielded from the cyclical variations in external labor market conditions: the employment relationship is progressively “internalized”. Then, we present empirical evidence supporting this prediction: the elasticity of wages to the unemployment rate decreases with tenure. This finding is robust to different specifications that allow for job heterogeneity, and it contributes to the interpretation of recent evidence of changes in the effect of the business cycle on wages.