COMPETITION AND RELATIONAL CONTRACTS: THE ROLE OF UNEMPLOYMENT AS A DISCIPLINARY DEVICE

Abstract When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long‐term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.     

A Forecast Model for Unemployment by Education

ABSTRACT We present a dynamic forecast model for the labour market: demand for labour by education and the distribution of labour by education among industries are determined endogenously with overall demand by industry given exogenously. The model is derived from a simple behavioural equation based on a strong relationship between the “strength” in the struggle for jobs of an educational group, and the change in relative supply. This relationship proves to be significant in the data. Furthermore, when used to forecast employment by education on real data, the model predicts reasonably well even for educational groups, where the initial forecast year is a change point for unemployment.     

The Effect of Trade on Employment and Wages in Italian Industry

The paper analyses the labour market impact of international trade on the Italian manufacturing sector. Using data for a panel of manufacturing industries the effects of trade‐induced changes in sales on employment and wages are investigated. The evidence suggests that the industry adjustment to demand shocks took place mainly through employment changes. However, increased exposure to foreign competition had a small effect on the Italian labour market, while technological change seems to have a major role in explaining the increase in unemployment.     

Forecasting the Educational Structure of Occupations: A Manpower Requirement Approach with Substitution

ABSTRACT: Manpower requirement forecasts are usually based on the assumption that discrepancies between supply and demand do not lead to adjustment processes at the labour market. We show, however, that even if the market mechanism functions completely, manpower requirement forecasts remain important information. On this basis, a manpower requirement approach is developed which incorporates the possibility of substitution processes at the labour market.     

Minimum Wage Effects on Labor Market Outcomes under Search,Matching, and Endogenous Contact Rates

Building upon a continuous‐time model of search with Nash bargaining in a stationary environment, we analyze the effect of changes in minimum wages on labor market outcomes and welfare. Although minimum wage increases may or may not lead to increases in unemployment in our model, they can be welfare‐improving to labor market participants on both the supply and demand sides of the labor market. We discuss identification of the model using Current Population Survey data on accepted wages and unemployment durations, and show that by incorporating a limited amount of information from the demand side of the market it is possible to obtain credible and precise estimates of all primitive parameters. We show that the optimal minimum wage in 1996 depends critically on whether or not contact rates can be considered to be exogenous and we note that the limited variation in minimum wages makes testing this assumption problematic.     

Regional Labour Market Adjustment: Are Positive and Negative Shocks Different?

This paper analyses regional labour market adjustment in the Finnish provinces during 1971–96. It investigates the interrelations of employment, unemployment and labour force participation to examine how a change in labour demand is adjusted to. The study questions the usual assumption that positive and negative shocks evoke similar adjustment processes. Instead, we test for the possibility that the effects of positive and negative shocks are asymmetric. The analysis reveals that there is little asymmetry in the adjustment to region‐specific labour demand shocks, but adjustment to total (region‐specific plus common component) shocks displays more asymmetry. The region‐specific component of a labour demand shock has short‐lived effects on unemployment and participation, and its effect on employment is very small but permanent [persistent?]. Initially, most of the fall in employment is absorbed by the unemployment and participation rate, but after a few years migration plays a larger role in the adjustment process.     

The Labour Market in Macedonia: A Labour Demand Analysis

Abstract. This paper examines the labour market in Macedonia, a country with the highest unemployment rate in Europe. I describe labour market institutions and policies during the transition. I also examine job creation and job destruction using firm‐level data and I estimate short‐term and long‐term elasticities of the labour demand. The analysis shows that there are regulatory barriers to the labour market flexibility. I can also conclude that the privatization of socially owned enterprises has failed to promote job creation. Nevertheless, labour market problems seem to stem from factors other than substantial sluggishness of firms in adjusting employment to variations in wages.     

The Pace of Job Creation and Destruction,Cyclical Shocks and Employment Dynamics

This paper investigates (un)employment dynamics in response to labour demand shocks using a small empirical flow model for the labour market in The Netherlands. The model explicitly takes account of the propagation of shocks through the various duration classes of unemployment and allows for duration dependence in the state of unemployment. A sensitivity analysis shows that 1. congestion in the matching process due to the increase in the pace of job creation and destruction may have substantial effects on (un)employment dynamics; 2. the effects depend very much on the initial pace of labour market dynamics and they are larger when the initial pace is low; 3. the labour market may be out of its equilibrium for quite a long time after a shock occurs; 4. fluctuations in the pace of job creation and destruction only lead to unemployment persistence in the model when the escape probability from long term unemployment is zero; otherwise, the economy returns to its original equilibrium, albeit with long adjustment lags in the case that the initial pace of structural change and/or the escape probability for long term unemployed is low.     

Efficiency Wage,Fixed Employment Costs,and Dual Labour Markets

The standard efficiency wage‐based explanation of labour market dualism hinges on the existence of differences in monitoring across sectors. The paper proposes fixed employment costs as an alternative source of wage differentials for homogeneous workers. It shows that firms with larger fixed costs pay higher wages in order to elicit more effort from their workers, and tend to have higher capital/labour ratio and labour productivity. The model generates both involuntary unemployment and involuntary confinement in the secondary sector: high effort–high wage jobs are preferred to low effort–low wage jobs and either are preferred to unemployment. The proposed framework can also account for the various types of treatment of marginal jobs in primary sector firms envisaged by Doeringer and Piore (Internal Labour Markets and Manpower Analysis, 1971). In particular, an increase in fixed costs beyond a certain level may induce primary sector firms to restructure, segment production, and enter the secondary sector, thus converting their jobs into secondary jobs. From a welfare point of view, we cannot state in general the desirability of subsidizing fixed employment costs; however, we show that an employment subsidy financed by a wage tax is able to increase employment with no loss in terms of production.     

Unions,Firing Costs,and Unemployment

Abstract. We study the effects of firing costs in unionized economies with heterogeneous workers. We consider an overlapping generations model where workers participate in the labour market both when young and when old. All workers belong to the same union that sets wages unilaterally. We find that at given wages firing costs increase youth unemployment and decrease old‐age unemployment. However, once the wage response is considered, firing costs increase both youth and old‐age unemployment. Indeed, knowing that when firing costs are higher firms refrain from firing, the union increases the wage of old workers, and, therefore, old‐age unemployment increases.     

Crime and Labour Market Opportunities in Italy (1993–2002)

Abstract. This paper investigates the relationship between labour market conditions and crime in Italy accounting for both age and gender in the unemployment measure and considering regional disparities between the North‐Centre and the South of Italy. Using regional data over the period 1993–2002, we study the impact of wages and unemployment on different types of crime. To mitigate omitted variables bias, we control extensively for demographic and socio‐economic variables. Empirical results suggest that unemployment has a large and positive effect on crime rates in southern regions. Our results are robust to model specification, endogeneity, changes in the classification of crimes, and finally, to alternative definitions of unemployment.     

On the Dynamics of Unemployment and Wage Distributions

Postel‐Vinay and Robin's (2002) sequential auction model is extended to allow for aggregate productivity shocks. Workers exhibit permanent differences in ability while firms are identical. Negative aggregate productivity shocks induce job destruction by driving the surplus of matches with low ability workers to negative values. Endogenous job destruction coupled with worker heterogeneity thus provides a mechanism for amplifying productivity shocks that offers an original solution to the unemployment volatility puzzle (Shimer (2005)). Moreover, positive or negative shocks may lead employers and employees to renegotiate low wages up and high wages down when agents' individual surpluses become negative. The model delivers rich business cycle dynamics of wage distributions and explains why both low wages and high wages are more procyclical than wages in the middle of the distribution.     

Flow and stock analysis of Polish unemployment: January 1990-June 1991*

Abstract. Unemployment is and will be for the foreseeable future one of the major issues of economies in transition. Not onIy is unemployment in post-communist economies a socially explosive problem; what happens on the unemployment front allows us to also make inferences about the state of the transition process in general. In this paper we look at Polish unemployment as it evolved from January 1990 to June 1991. A framework is developed which allows us to discuss flows into and out of unemployment. In analyzing the determinants of the various flows we discuss the macroeconomic environment brought about by the reforms and the role of prices and wages. However, we stress above all institutional and structural factors which have an impact on labour flows in the Polish post-communist economy. The stocks of several variables are also analyzed. We relate the trends of some unemployment stocks (especially the stocks of school leavers and group layoffs) to the trend of the overall stock of unemployment. We also look at the trends of vacancies and of various UIV ratios and touch upon the short run and long run trends of employment by sector. The main conclusion of the paper is that the high level of unemployment in Poland is neither due to the elimination of hidden unemployment (it actually increased in 1990!) nor a result of restructuring. The level of unemployment is high because of large inflows from outside the labour force and because hirings have been much fewer than in previous years while separations have only been slightly greater.     

Regional Differentials in Unemployment Rates: The Economic Causes

Abstract. Recent studies on the causes that bring about the increase in unemployment rates of the Mezzogiorno area and Italy are mainly based upon demographic and social causes. The aim of this study is to verify if they can be also influenced by economic factors. Through a dynamic model with partial adaptive hypothesis, some ways by which demand affects the differences of regional unemployment rates has been tested. In this respect it has been considered whether variations in economic activity can lead to different growth rates of regional production owing to the different industrial structures; whether the employers are influenced by local factors in varying the occupation when the production increases, and finally in which way the regional unemployment rate depends on the excess of desired, over effective, labour demand. Data base are from 1959 to 1976, and the unemployment rate is referred only to unemployed workers that is the better proxy of the unemployment connected with the economic cycle. The results show a slight reactiveness to demand, both in industrial labour demand and supply in the Mezzogiorno.     

Short-Run Wage Flexibility and Labour Market Adaptation in Western Europe

ABSTRACT: This paper starts by reviewing some of the evidence relating to movements in relative wages, asking what have been their causes and whether they serve to allocate labour across labour markets. Much of the research has tended to focus on the statistical sources available, and therefore to focus on movements of pay between industries rather than firms, between occupations, and between workers with different levels of qualification. This has greatly constrained the possibility of linking these different dimensions to look at the ideal question, namely to what extent do relative wages respond to labour supply and demand pressures, and to what extent do they help to reconcile these two pressures. In addition, evidence from studies based on data obtained from individual firms also broadly supports the view that wage differentials are not very responsive to supply and demand pressures, and also that they are mostly not very effective in promoting the adaptation of labour supply and demand across labour markets. The paper ends by considering briefly some recent policy ideas for increasing the responsiveness of relative wages to demand changes.     

Unemployment and Endogenous Growth

In this paper we develop a two-sector endogenous growth model with a dual labour market, based on efficiency wages. Growth is driven by intentional R&D performed in the high-tech and high-wage sector. How a change in rivalry among firms affects simultaneously growth and unemployment is examined. On the one hand, an increase of the elasticity of substitution between the product varieties of different high-tech firms reduces market power and leads to higher growth but reduces job prospects. On the other hand, if barriers to entry exist, an increase of the number of rivals in the market (due to removal of entry barriers) leads to lower growth, whereas the effect on aggregate employment is ambiguous.     

Labour Policy in the Federal Republic of Germany: Challenges and Concepts

ABSTRACT: This paper describes how German labour policy, both employment policy and active labour market policies, has developed between 1974 and 1987. Government intervention for full employment in a welfare state, a cooperative system of industrial relations, an active labour market policy, and a comparatively efficient system of vocational and adult education did not prevent the loss of full employment in 1974. But persistent labour market slack until today has not fundamentally changed the climate of relative political and social calm. The basic concepts, programmes and specific measures of labour policies pursued in the FRG are surveyed with special reference to their costs and effects on employment and the structure of unemployment. The challenges to labour policy stem from three complete business cycles around a slightly falling trend in employment and the bad prospectives of the German labour market until the year 2000. Four major measures of labour market policy now reduce registered unemployment by about 400,000 in the mid 1980s. Total costs of unemployment amounting to 57 billion DM per year offer financial alternatives to create jobs and to reduce working hours. Finally, actual proposals under discussion in Germany are examined in order to combat unemployment in a determined commitment to full employment immediately.     

Modelling Labour Demand Dynamics beyond the Frictionless Environment

Abstract. In this study we develop a simple econometric model for labour demand dynamics by explicitly considering deviations from the standard frictionless economic environment. In particular, we explore the potential effect on labour demand of capital market imperfections, labour market institutional rigidities in the form of union power, and the impact of uncertainty. In addition, in the presence of uncertainty, adjustment costs and irreversibility emerge as an important factor that introduces an option value of waiting. According to our results, leverage exerts a direct negative impact on employment dynamics indicating that capital market imperfections are indeed present. Moreover, leverage is found to also affect the adjustment process of employment. Finally, we document asymmetric effects of frictions on labour demand across different size groups that imply a higher vulnerability of small and medium sectors with respect to debt levels. Uncertainty exerts a significantly negative impact on labour demand, which is compatible with presence of partial irreversibility of employment decisions. Finally, unions over and above their effect via higher wages are positively related to employment, a finding that is indicative of their pursue for job security.     

Unemployment and Monetary Integration: On the relevance of wage-formation characteristics in a target-zone regime versus an irrevocably fixed exchange-rate regime

Abstract. This paper examines the relevance of wage-formation characteristics for the evolution of unemployment, comparing the current semi-fixed exchange rate system (EMS, described by a target zone regime) with an irrevocably fixed exchange-rate regime (EMU). The topic is analyzed in a model which emphasizes the working of the labour market and distinguishes between three types of shocks (a shock to money demand, goods demand and goods supply). The analysis points out that the impact of wage formation on unemployment depends crucially on the kind of shock as well as the exchange-rate regime in force.     

Union Power and (Un)Employment

Is the monopoly face of unions, i.e. their ability to enforce wages above what non-unionised firms would pay, harmful to employment and output? It is shown that a positive answer to this question is far less compelling than commonly held views based on a negatively sloped labour demand curve suggest. First, the labour demand curve may be irrelevant for the employment decision of unionised firms. Second, even if the labour demand curve is relevant, selfish union workers are likely to accept a system of wage discrimination which does away with discrepancies between the marginal product and the reservation wage. And third, the labour demand curve may have a positive slope.