Wage Formation,Regional Migration and Local Labour Market Tightness*

Empirical studies of regional wage formation and interregional migration routinely include the regional unemployment rate as indicator of local labour market tightness. However, these studies are usually motivated by economic theories that emphasize transition probabilities between unemployment and employment, and the unemployment rate is an imperfect proxy for these probabilities. We use a large micro data set to compute estimates of the rate of outflow from unemployment for 90 Norwegian travel‐to‐work areas. The outflow rates perform better than traditional measures of regional labour market tightness in panel data analyses of regional wages and interregional migration.     

Progressive Taxes and the Labour Market: Is the Trade–off Between Equality and Efficiency Inevitable?

Does an income tax harm economic efficiency more the more progressive it is? Public economics provides a strong case for a definite ‘yes’. But at least three forces may pull in the other direction. First, low–wage workers may on average have more elastic labour supply schedules than high–wage workers, in which case progressive taxes contribute to a more efficient allocation of the total tax burden. Second, in non–competitive labour markets, progressive taxes may encourage wage moderation, and hence reduce the equilibrium level of unemployment. And third, if wage setters have egalitarian objectives, progressive taxes may reduce the need for redistribution in pre–tax wages, and hence increase the demand for low–skilled workers. This paper surveys the theoretical, as well as the empirical literature about labour supply, taxes and wage setting. We conclude that in a second best world, the trade–off between equality and efficiency is not always inevitable.     

Optimal tax progressivity in imperfect labour markets

All modern labour market theories capable of explaining involuntary unemployment as an equilibrium phenomenon imply that increased income tax progressivity reduces unemployment, but they also imply that higher progressivity tends to reduce work effort and labour productivity. This suggests that there may be an optimal degree of tax progressivity where the marginal welfare gain from reduced involuntary unemployment is just offset by the marginal welfare loss from lower productivity. This paper sets up four different models of an imperfect labour market in order to identify the degree of tax progressivity which would maximise the welfare of the representative wage earner. Simulations with these models suggest that the optimal degree of tax progressivity could be quite large, although the results are sensitive to the generosity of unemployment benefits and to the after-tax wage elasticity of work effort.     

Do Low‐Wage Workers React Less to Longer Unemployment Benefits? Quasi‐Experimental Evidence*

The fact that unemployed workers have different abilities to smooth consumption entails heterogeneous responses to extended unemployment benefits. Our empirical exercise explores a quasi‐experimental setting generated by an increase in the benefits entitlement period. The results suggest a hump‐shape response of unemployment duration over the one‐year pre‐unemployment wage distribution; individuals at the bottom and top of the wage distribution reacted less than those in the interquartile range. This behaviour of job searchers is consistent with labour supply models with unemployment insurance and savings. It questions the optimality of very long entitlement periods to target the unemployment experiences of low‐wage workers.     

Wage equations,wage curves and all that

This paper is concerned with the relationship between wages and unemployment. Using UK regions and individuals as the basis for our analysis, the following questions are investigated. First, is the wage equation a relationship between unemployment and wages or wage changes? Second, can we identify the relationship completely by looking at regional wages and regional unemployment or do regional wages depend on aggregate unemployment as well? Third, can we identify an upward sloping cross-section relationship between wages and unemployment corresponding to a zero migration condition? Finally, are wages influenced only by the current state of the labour market or do contracts lead to wages depending on labour market conditions in the last boom or upon entry into the job?     

LOCAL PAY DETERMINATION

Abstract. Theoretical models of local pay are reviewed, ranging from neoclassical perspectives, unemployment/wage trade-off models, and segmented labour market approaches. The empirical work on U.S. North-South differentials is discussed. For the U.K., studies of the extent of and trends in geographical pay differentials are considered, as well as behavioural explanations focusing on the role of excess demand. The issue of adjustment processes is then discussed, both in theory and in relation to empirical work for the U.S. and U.K. This discussion focuses largely on geographical spillover effects, in terms of origins, evidence, and issues of identification. Finally, the impact of certain impediments in the adjustment process are considered, specifically in relation to the U.K. These concern the role and influence of national wage bargaining, as well as factors inhibiting labour migration, stemming from the housing market and the climate of the national labour market.     

Is Child Work Necessary?*

This article investigates the hypothesis that child labour is compelled by poverty. It shows that a testable implication of this hypothesis is that the wage elasticity of child labour supply is negative. Using a large household survey for rural Pakistan, labour supply models for boys and girls in wage work are estimated. Conditioning on non-labour income and a range of demographic variables, the article finds a negative wage elasticity for boys and an elasticity that is insignificantly different from zero for girls. Thus, while boys appear to work on account of poverty compulsions, the evidence for girls is ambiguous.     

Equilibrium unemployment with outsourcing under labour market imperfections

We study the effects of international outsourcing on equilibrium unemployment in a high-wage economy with labour market imperfections. We demonstrate, consistent with empirical results, that the wage elasticity of labour demand is increasing as a function of outsourcing. Furthermore, we show that a production mode with more outsourcing reduces the negotiated wage in a high-wage country with labour market imperfections if the relative bargaining power of the labour union is sufficiently high. Under such circumstances outsourcing reduces equilibrium unemployment. Finally, we characterize the optimal production mode showing that stronger labour market imperfections induce a production mode with more outsourcing.     

Seasonality and Wage Responsiveness in a Developing Agrarian Economy

This paper studies the wage responsiveness of labour supply and demand, simultaneously addressing the twin issues of the non-clearing of developing rural labour markets and seasonality. It employs a data set pertaining to south-central India, and limits itself to the agricultural market for daily-rated labour (by far the predominant form of wage contract in the sample villages). Estimating a theoretically robust and empirically justified disequilibrium model of the agricultural labour market, we find no evidence of backward-bending supply curves or 'vertical' demand curves, contrary to findings in the literature. Further, while the agricultural labour market appears to be in equilibrium during the kharif (or rainy) season, it manifests excess supply in the rabi (or post-rainy) season.     

Minimum Wages and Youth Unemployment: Will Britain Learn from Canada?

Norman Tebbit is spending vast sums on palliatives for youth employment. Minimum wage legislation may be responsible for nearly 40 per cent of youth unemployment in Britain. Canada suggests that unemployment must result if the labour market is prevented from accommodating population change through state-imposed rigidities which prevent changes in the price of labour.     

Union wages,hours of work and the effectiveness of partial coordination agreements

Small monopoly trade unions decide upon the wage rate per hour and the hours of work subject to firm's demand for union members. Since the resulting Nash equilibrium is characterized by excess unemployment, we study the employment and welfare effects when trade unions try to coordinate their policies. Firstly, we consider a joint agreement about marginal wage moderation, where trade unions remain free to choose the hours of work non-cooperatively. Secondly, we analyze in which way a joint change in the hours of work affects employment and welfare if trade unions are free to choose the wage rate.     

Unemployment,disequilibrium and the short run phillips curve: An econometric approach

The paper specifies a disequilibrium model for the aggregate labour market consisting of demand and supply functions for labour, an adjustment equation for wages as well as for prices, a transactions equation and, finally, an equation that relates measured unemployment to vacancies and to excess demand. The model has a more sophisticated treatment of dynamics than earlier disequilibrium models. The parameter estimates and the goodness-of-fit are satisfactory and the model's implications for the behaviour of several important variables are sensible. In particular, excess demand estimates computed in various ways are reasonable.     

MIND THE GAP: UNEMPLOYMENT IN THE NEW EU REGIONS

Abstract.  The paper surveys the theoretical and empirical literature on regional unemployment during transition in Central and Eastern Europe. The focus is on optimal speed of transition (OST) models and on comparison of them with the neo-classical tradition. In the typical neo-classical models, spatial differences essentially arise as a consequence of supply side constraints and institutional rigidities. Slow-growth, high-unemployment regions are those with backward economic structures and constraints on factors mobility contribute to making differences persistent. However, such explanations leave the question unanswered of how unemployment differences arise in the first place. Economic transition provides an excellent testing ground to answer this question. Pre-figuring an empirical law, the OST literature finds that the high degree of labour turnover of high unemployment regions is associated with a high rate of industrial restructuring and, consequently, that low unemployment may be achieved by implementing transition more gradually. Moreover, international trade, foreign direct investment and various agglomeration factors help explain the success of capital cities compared to peripheral towns and rural areas in achieving low unemployment. The evidence of the empirical literature on supply side factors suggests that wage flexibility in Central and Eastern Europe is not lower than in other EU countries, while labour mobility seems to reinforce rather than change the spatial pattern of unemployment.     

Teacher shortages and the business cycle

The ability of the public sector to recruit skilled workers is important for the quality of public sector services. Centralized and rigid pay systems in the public sector might reduce labour supply and lead to shortages of qualified personnel in areas and periods with strong outside labour markets. This paper shows that teacher shortages measured by the share of teachers without approved education are strongly procyclical in Norway. Using a large panel of Norwegian local governments for 1981–2002 and exploiting the rigid wage system, we find a sizeable negative relationship between teacher shortages and the regional unemployment rate.     

Monopsonistic competition for the “best” workers

In this paper we analyse an economy where firms use labour as the only production factor, with constant return to scale. We suppose that jobs differ in their non-wage characteristics so each firm has monopsonistic power. In particular, we suppose that workers are heterogeneous with respect to their productivity. Then, each firm has incentives to offer higher wages in order to recruit the most productive workers. Competition among firms leads to a symmetric equilibrium wage, which is higher than the reservation wage, and to involuntary unemployment for the less productive workers, who are willing to work at the current wage but are not hired because their productivity is lower than the wage level. If firms have no institutional constraint on paying lower wages for the same job, an endogenous labour market segmentation emerges.     

Labour supply and commuting time: An empirical study

We estimate a simple labour supply model that incorporates commuting time in a utility maximizing framework. Housing prices are assumed to vary with commuting time, and the elasticity of housing prices with respect to the latter is estimated to be about 10 percent. Using this elasticity estimate the price of commuting time averaged over all individuals is $3.22 while the wage rate is $4.72; thus commuting time is implicitly valued at about two-thirds of the wage rate on average. As far as work hours are concerned, almost all individuals are on the backward bending part of their labour supply curve.     

Equilibrium unemployment and wage formation with matching frictions and worker moral hazard

This paper combines the shirking and the matching approaches of equilibrium unemployment in order to endogenize the wage formation process as a function of labour market conditions. The steady-state equilibrium can take two forms depending on whether the no-shirking condition is binding or not. It is demonstrated that the efficiency wage approach is relevant when the unemployment rate is above a certain threshold. Furthermore, an efficiency wage is more likely when the disutility of effort is high, recruiting costs and workers' bargaining power are low, inspections are unlikely and the workers' productivity is weak.     

Public–private sector wage differentials and the business cycle

This paper uses microeconomic data for the period from 1990 to 2004 to examine the relationship between public–private sector wage differentials and labour market conditions in Finland. The results show that the public sector wage premium is strongly counter-cyclical. On average, a 10 percent increase in the local unemployment rate increases the public–private sector wage gap by one percent. Separate analyses by government sector and quantiles of the distribution of wages reveal that it is local government workers and those working at lower skill levels who benefit more from increasing unemployment rate. The paper also exploits the longitudinal structure of the data to examine whether the results are constant over time. These results indicate that the cyclical pattern primarily emerges in years with deteriorated labour markets.     

Monopsonistic discrimination, worker turnover, and the gender wage gap

Motivated by models of worker flows, we argue in this paper that monopsonistic discrimination may be a substantial factor behind the overall gender wage gap. Using matched employer–employee data from Norway, we estimate establishment-specific wage premiums separately for men and women, conditioning on fixed individual effects. Regressions of worker turnover on the wage premium identify less wage elastic labour supply facing each establishment of women than that of men. Workforce gender composition is strongly related to employers' wage policies. The results suggest that 70–90% of the gender wage gap for low-educated workers may be attributed to differences in labour market frictions between men and women, while the similar figures for high-educated workers ranges from 20 to 70%.     

The sources of unemployment fluctuations: an empirical application to the Italian case

The paper analyses the rise in Italian unemployment in a small structural VAR (sVAR) based on a Layard–Nickell framework. Unemployment is driven by fully permanent and long-lived but temporary shocks. The unemployment component due to demand shocks appears sizeable, with swings amounting to 4 percentage points, and quite persistent, showing an almost continuous increase since the beginning of the 1980s. Nonetheless, the bulk of unemployment rises is attributed to non-demand factors: temporary (productivity and labour supply) and permanent (labelled as shocks to wage bargaining). The latter explain a 2.5-point rise during the 1970s, but showing no further increases since then.