Modelling Wage Growth Dynamics in Italy, 1960-90

ABSTRACT: In this work we analyse the common dynamic properties of wage inflation, price inflation, unemployment and labour productivity using Italian annual data (1960-90, source: Prometeia). Applying multivariate cointegration technique we test for the presence of a wage equation and a price mark-up equation. The preferred identification suggests that it is possible to build up an error correction representation for the wage inflation, in which the rate of acceleration in wages depends on the contemporaneous rate of acceleration in prices and on the adjustment to long-run disequilibrium as represented by a Phillips type relation. This representation is rejected for the price inflation which turns out to be weakly exogenous within the system. Furthermore, there is evidence that wage inflation does not Granger-cause price inflation. The overall conclusion is that wage inflation does not contribute in explaining the price inflation process and the traditional mark-up view of inflation is not supported by data. The policy implication is that monetary policy need not respond to wage data because they do not contain additional information about the future path of inflation.     

Wage Inflation and Unemployment in Britain and America 1892–1991

This paper examines the stability of the wage inflation process in Britain and America from 1892 to 1991. Utilizing a simple model of the aggregate labor market that treats wage inflation and the annual change in the unemployment rate as jointly endogenous variables, we find no evidence of substantial parameter shifts. In particular, there is no evidence of a secular increase in wage rigidity in either country nor is there support for the notion that periods of persistently high unemployment, such as the 1930s or the 1980s, are characterized by significant increases in wage rigidity. Our results are consistent with the findings of several other studies and indicate that wage rigidity has been a stable characteristic of labor markets since the end of the 19th century. Our results also suggest that the unemployment performance of these two countries over time can be explained by the interaction of demand shocks and wage rigidity.     

Wage Structure,Incomes Policy and Decentralised Bargaining: the Case of Greece

Abstract. Developments in Greek industrial relations suggest that decentralised bargaining is not a panacea. The manufacturing wage structure in Greece has an exceptional course associated with the rise of informal decentralised bargaining. Interindustry wage differentials increased in a period of incomes policies aiming to narrow the wage structure. The influence exerted by inflation and unemployment is, compared to past evidence from the US. and the U.K., quite unconventional. Under informal bargaining, high-wage powerful industrial branches “benefit” from higher inflation and lower unemployment.     

The social and psychological causes of inflation

It appears that it is no longer possible for the rate of inflation in Britain and other advanced industrial economies to be controlled by the traditional macro- economic reglators, at least within the limits imposed by other politico-economic goals (such as the maintenance of an acceptable level of unemployment). This has led many to look for explanations of inflation beyond economic analysis: in the psychology of wage and salary earners; in the changing class structure of our society; in the changing loci of power and means of exercising power; and in our systems of labour relations and pay determination.The author's organization (PEP—Political and Economic Planning) have just come to the end of a programme of research concerned with the contribution that non- economic perspectives can make to an understanding of the process of inflation. The author has been focusing upon the pressure on pay and has carried out two studies designed to explore the forces contributing to the apparent increase in the demand for pay increases and the conviction that these are legitimate among wage and salary earners. This article describes his findings.     

Empirical Estimates of the NAIRU

Abstract. Empirical studies have found that the non‐accelerating inflation rate of unemployment (NAIRU) has been fluctuating in OECD countries around a constant mean of several percentage points over the past decades. This mean is calculated from the constant terms carried over from the wage and price growth equations. In this paper it is shown that a high proportion of the constant term is a statistical artefact and suggests a new method which yields approximately unbiased estimates of the time‐invariant NAIRU. Using data for OECD countries it is shown that the constant‐term correction lowers the unadjusted time‐invariant NAIRU by approximately half.     

Employment‐protecting Labour Market Institutions and Inward Foreign Direct Investments

Abstract. This paper proposes labour market institutional arrangements as a strategic device to induce or deter export‐substituting inward foreign direct investments (FDI) — in either instance protecting domestic employment. In a union‐oligopoly context it is shown that, if the FDI‐associated unit costs (FC) are not high enough, then employment‐neutral (‐enhancing) inward FDI will emerge in equilibrium if the domestic wage setting is credibly centralized and the unemployment benefit is sufficiently high (low), each instance arising for a different range of — intermediate — FC values. If however the FC values are sufficiently high, then the centralized structure of wage setting along with a low enough unemployment benefit will deter employment‐reducing inward FDI.     

SORTING AND THE OUTPUT LOSS DUE TO SEARCH FRICTIONS

We analyze a general search model with on‐the‐job search (OJS) and sorting of heterogeneous workers into heterogeneous jobs. For given values of nonmarket time, the relative efficiency of OJS, and the amount of search frictions, we derive a simple relationship between the unemployment rate, mismatch, and wage dispersion. We estimate the latter two from standard micro data. Our methodology accounts for measurement error, which is crucial to distinguish true from spurious mismatch and wage dispersion. We find that without frictions, output would be about 9.5% higher if firms can commit to pay wages as a function of match quality and 15.5% higher if they cannot. Noncommitment leads to a business‐stealing externality which causes a 5.5% drop in output.     

Macroeconomic Determinants of Equilibrium Unemployment Insurance

This paper proposes a new modeling strategy as regards the definition of an optimal level of unemployment benefits. While the traditional methodology privileges labor market equilibrium to derive optimal employment, wage and unemployment benefit levels, we present a model in which the optimal level of unemployment benefits is a function of the government’s macroeconomic objectives in terms of inflation and output fluctuations. In a second stage, the model allows for the investigation of unemployment insurance effects on labor market equilibrium.     

Wage Bargaining and Profitability: A Disaggregative Analysis

Abstract. Previous analyses of the wage/profit relationship at a disaggregative level in Britain have given positive results for pre-war years but negative results for early post-war years. However, this is probably due to the increasingly unreliable nature of the enterprise- based profits series published in the National Accounts until 1982. We have constructed, instead, what are essentially establishment-based Census data on profits for fourteen manufacturing industries, up to 1986. We have also been able to extend the disaggregative unemployment data, the publication of which also ceased in 1982. The wage equations that we have estimated include profits and unemployment (and other variables) in an explicit Nash bargaining model, in line with widely held views as to the way that wage negotiations are actually conducted. The results obtained show a highly significant role for profits, as well as having other implications, notably the positive (hysteresis) effect of industry unemployment, by contrast with the normal negative effect of aggregate unemployment, and the important effects of relative wages - which play a large role in various disaggregative studies of the propagation of inflation.     

WHY ARE THE 2000s SO DIFFERENT FROM THE 1970s? A STRUCTURAL INTERPRETATION OF CHANGES IN THE MACROECONOMIC EFFECTS OF OIL PRICES

In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach, Blanchard and Gali (in J. Gali and M. Gertler (eds.) 2009, International Dimensions of Monetary Policy, University of Chicago Press, pp. 373–428) argued that this reflected a change in the causal relation from the price of oil to output and inflation. They then argued that this change could be due to a combination of three factors: a smaller share of oil in production and consumption, lower real wage rigidity, and better monetary policy. Their argument, based on simulations of a simple new‐Keynesian model, was informal. Our purpose in this paper is to take the next step, and to estimate the explanatory power and contribution of each of these factors. To do so, we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of two samples (pre‐ and post‐1984), the distance between the empirical SVAR‐based impulse response functions and those implied by a new‐Keynesian model. Our empirical results point to an important role for all three factors.     

Efficiency‐wage Unemployment and Economic Welfare in a Model of Endogenous Growth

This paper examines positive and normative implications of efficiency‐wage‐induced unemployment within a model of endogenous growth. Sector‐specific impacts of the wage rate on labour efficiency establish a correlation between the growth rate and the rate of unemployment. The sign of this correlation is determined by the intersectoral wage differential. Despite the existence of unemployment, decisive positive properties of the full‐employment model are preserved. However, welfare implications of the full‐employment model may be reversed. The optimal policy can be to reduce growth, while at the same time raising unemployment.     

Wage Flexibility for Skilled and Unskilled Workers: New Evidence on the Norwegian Wage Curve

Empirical evidence is provided in favour of a hypothesis that wages for unskilled workers are more responsive to unemployment than wages for skilled workers. The results imply vigorous wage responsiveness to low levels of unemployment for both groups, while the wage curves become almost entirely flat for unemployment rates above 1.7 percent. One interpretation of this result is that firms have strong incentives to increase wages in order to recruit and retain workers when unemployment is below some critical level. Since unemployed workers will certainly find work, the expected costs of a job loss are small, as are costs associated with an egalitarian wage policy.     

INFLATION RISK PREMIA IN THE TERM STRUCTURE OF INTEREST RATES

This paper estimates the size and dynamics of inflation risk premia in the euro area, based on a joint model of macroeconomic and term structure dynamics. Information from both nominal and index‐linked yields is used in the empirical analysis. Our results indicate that the inflation risk premium on euro area 10‐year nominal yields was approximately equal to 20 basis points on average over the 1999–2007 period. The inflation premium has also been subject to moderate, but statistically significant fluctuations. For the post‐2003 period in which reliable index‐linked bond prices are available, our results suggest that increases in the raw break‐even inflation rate above 2%, the upper bound of the European Central Bank's definition for price stability, have mostly reflected variations in the inflation risk premium, while long‐term inflation expectations have remained well anchored.     

Time Preferences and Job Search: Evidence from France

Abstract. Increasing impatience reduces search efforts of unemployed job seekers and therefore decreases the exit rate from unemployment. Also, impatience reduces reservation wage and increases the exit rate. To determine the overall effect of impatience on the exit rate from unemployment, we distinguish between exponential and hyperbolic time preferences. Search effort dominates the reservation wage and decreases the exit rate from unemployment if individuals have hyperbolic, rather than exponential, preferences. Using the French sample of the European Household Panel Survey, we found that search effort has a strong effect on the duration of unemployment, whereas the reservation wage is not significant. This result shows that the job seekers have hyperbolic preferences. Hyperbolic preferences affect problems associated with job search and policies aimed at reducing unemployment.     

UNDERSTANDING THE EVOLUTION OF THE US WAGE DISTRIBUTION: A THEORETICAL ANALYSIS

In this paper, we propose an analytically tractable overlapping‐generations model of human capital accumulation and study its implications for the evolution of the US wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill‐biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with some prominent trends observed in the US data including (i) a rise in overall wage inequality both in the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) a rise in within‐group inequality, (v) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (vi) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC and interpreting the transformation of the US labor markets since the 1970s.     

Education,Mobility and Employers’ Monopsony Power: A Search‐theoretic Analysis

Abstract. We analyse the efficiency of schooling choices in a wage‐posting search equilibrium model with on‐the‐job search. The workers have multidimensional skills and the search market is segmented by technology. Education determines the scope — or adaptability— of individual skills. Individuals obtain schooling to leave unemployment more quickly and to climb the wage ladder rapidly through job‐to‐job mobility — that is, to speed up job shopping. Education reduces firms’ monopsony power in the wage determination by improving workers’ mobility. As a result, the wage distribution shifts rightward with aggregate schooling. However, the ratio of vacant jobs to job seekers also falls in each sector. Either one or the other externality may dominate, implying, respectively, under‐ or over‐education. A combination of minimum wage and schooling fee can decentralize the efficient allocation.     

THE JOINT DESIGN OF UNEMPLOYMENT INSURANCE AND EMPLOYMENT PROTECTION: A FIRST PASS

Unemployment insurance and employment protection are typically discussed and studied in isolation. In this paper, we argue that they are tightly linked, and we focus on their joint optimal design in a simple model, with risk‐averse workers, risk‐neutral firms, and random shocks to productivity. We show that, in the “first best,”unemployment insurance comes with employment protection—in the form of layoff taxes; indeed, optimality requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations from first best: limits on insurance, limits on layoff taxes, ex post wage bargaining, and ex ante heterogeneity of firms or workers. We show how the design must be modified in each case. Finally, we draw out the implications of our analysis for current policy debates and reform proposals, from the financing of unemployment insurance, to the respective roles of severance payments and unemployment benefits.     

Market Volatility and the Structure of US Earnings

This paper studies the relationship between volatility of industry‐specific shipments and real earnings. In an efficiency wage theoretical framework I show that wage premiums for the risk of unemployment depend on the value of the worker’s outside offer net of his/her mobility costs. Empirically it is shown that wage premiums for the risk of unemployment markedly vary in a cross section of workers. The main finding is that market volatility changes the return to skill such as labor market experience and education. Its impact markedly varies across occupation groups, with managers receiving returns to labour market experience that significantly increase with product market volatility.     

The Determinants and Some Consequences of Unemployed Workers' Wage Demands

This paper studies the determinants and consequences in the early stages of the hiring process of unemployed workers' wage demands using direct data on workers' wage requests. We show that most unemployed workers want a wage close to their previous wage, and thus much more than they get in unemployment benefits. However, some groups, such as women, tend to demand lower wages. Moreover, we find that workers with high wage demands are contacted by firms less often than otherwise similar workers with lower wage demands. Thus, our results suggest that too high wage demands may contribute to high unemployment.     

Labour Market Structures,Labour Market Policy and Wage Formation in the OECD

This paper investigates why the incentive to moderate wages in an environment of rising unemployment differs so strongly among the OECD countries. In the first part we develop an insider-outsider bargaining model in which the wage results from a confrontation of the insiders' wage claims and the employer's wage offer. The second part of the paper empirically tests the model's predictions for the determinants of wage flexibility. The degree of centralization of wage bargaining, the extent of active labour market policy and the characteristics of the unemployment benefit system are shown to be relevant determinants.