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.     

The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?

I discuss the failure of the canonical search and matching model to match the cyclical volatility in the job finding rate. I show that job creation in the model is influenced by wages in new matches. I summarize microeconometric evidence and find that wages in new matches are volatile and consistent with the model's key predictions. Therefore, explanations of the unemployment volatility puzzle have to preserve the cyclical volatility of wages. I discuss a modification of the model, based on fixed matching costs, that can increase cyclical unemployment volatility and is consistent with wage flexibility in new matches.     

An Equilibrium Theory of Learning,Search, and Wages

We examine the labor market effects of incomplete information about the workers' own job‐finding process. Search outcomes convey valuable information, and learning from search generates endogenous heterogeneity in workers' beliefs about their job‐finding probability. We characterize this process and analyze its interactions with job creation and wage determination. Our theory sheds new light on how unemployment can affect workers' labor market outcomes and wage determination, providing a rational explanation for discouragement as the consequence of negative search outcomes. In particular, longer unemployment durations are likely to be followed by lower reemployment wages because a worker's beliefs about his job‐finding process deteriorate with unemployment duration. Moreover, our analysis provides a set of useful results on dynamic programming with optimal learning.     

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.     

PAYROLL TAXES,SOCIAL INSURANCE,AND BUSINESS CYCLES

Payroll taxes represent a major distortionary influence of governments on labor markets. This paper examines the role of time‐varying payroll taxes and the social safety net for cyclical fluctuations in a nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search effort. A balanced social insurance budget induces countercyclical payroll taxation, renders gross wages more rigid over the cycle and strengthens the model's endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve and countercyclical unemployment as well as substantial volatility and persistence of vacancies and unemployment.     

Directed Search for Equilibrium Wage–Tenure Contracts

I construct a theoretical framework in which firms offer wage–tenure contracts to direct the search by risk‐averse workers. All workers can search, on or off the job. I characterize an equilibrium and prove its existence. The equilibrium generates a nondegenerate, continuous distribution of employed workers over the values of contracts, despite that all matches are identical and workers observe all offers. A striking property is that the equilibrium is block recursive; that is, individuals' optimal decisions and optimal contracts are independent of the distribution of workers. This property makes the equilibrium analysis tractable. Consistent with stylized facts, the equilibrium predicts that (i) wages increase with tenure, (ii) job‐to‐job transitions decrease with tenure and wages, and (iii) wage mobility is limited in the sense that the lower the worker's wage, the lower the future wage a worker will move to in the next job transition. Moreover, block recursivity implies that changes in the unemployment benefit and the minimum wage have no effect on an employed worker's job‐to‐job transitions and contracts.     

Noncontractible Heterogeneity in Directed Search

This paper provides a directed search model designed to explain the residual part of wage variation left over after the impact of education and other observable worker characteristics have been removed. Workers have private information about their characteristics at the time they apply for jobs. Firms value these characteristics differently and can observe them once workers apply. They hire the worker they most prefer. However, the characteristics are not contractible, so firms cannot condition their wages on them. This paper shows how to extend arguments from directed search to handle this, allowing for arbitrary distributions of worker and firm types. The model is used to provide a functional relationship that ties together the wage distribution and the wage–duration function. This relationship provides a testable implication of the model. This relationship suggests a common property of wage distributions that guarantees that workers who leave unemployment at the highest wages also have the shortest unemployment duration. This is in strict contrast to the usual (and somewhat implausible) directed search story in which high wages are always accompanied by higher probability of 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.     

Wage Dispersion and Equilibrium Search Models: Some Evidence from Italy

This paper provides a structural estimation of an equilibrium search model with on‐the‐job search and heterogeneity in firms' productivities using a sample of Italian male workers. Results indicate that arrival rates of offers for workers are higher when unemployed than when employed and firms exploit their monopsony power when setting wages. As a result, workers earn far less than their marginal product. The model is then used to study regional labour market differentials in Italy. Wide variation in frictional transition parameters across areas helps to explain persistent unemployment and wage differentials.     

A POLITICAL ECONOMY THEORY OF FISCAL POLICY AND UNEMPLOYMENT

This paper presents a political economy theory of fiscal policy and unemployment. The underlying economy is one in which unemployment can arise but can be mitigated by tax cuts and increases in public production. Such policies are fiscally costly, but can be financed by issuing government debt. Policy decisions are made by a legislature consisting of representatives from different political districts. With the available policies, it is possible for the government to completely eliminate unemployment in the long run. However, with political decision making, the economy always has unemployment. Unemployment is higher when the private sector experiences negative shocks. When these shocks occur, the government employs debt‐financed fiscal stimulus plans which involve both tax cuts and public production increases. When the private sector is healthy, the government contracts debt until it reaches a floor level. Unemployment levels are weakly increasing in the economy's debt level, strictly so when the private sector experiences negative shocks. Conditional on the level of workers employed, the mix of public and private output is distorted.     

Wages and Unemployment in Italy,a Long Term Perspective

ABSTRACT: This paper traces a long-term perspective of the relationship between wages and unemployment in the Italian economy from the end of the fifties to the mid-eighties. During this period, the rate of unemployment exhibited three distinct time profiles. After a cyclical episode from around 1958 to the mid-sixties, the unemployment rates changed very little for a decade, showing only mild fluctuations until 1975. Since then, unemployment has been increasing steadily, and in 1987 it exceeded 12|X% of the labour force. The aim of this paper is not to provide a new interpretation of facts, but rather to assess whether, and when, wage pressure has represented a significant factor in the evolution of unemployment. The main conclusion of the paper is that the considerable rise in unemployment observed since the mid-70s is part of a long term evolution, and that in the long-run wages are not exogenous. Though there have been periods of exogenous wage push temporarily affecting unemployment, the argument that the continuous rise in unemployment depends on inappropriate real wages has no empirical content.     

Modeling Earnings Dynamics

In this paper, we use indirect inference to estimate a joint model of earnings, employment, job changes, wage rates, and work hours over a career. We use the model to address a number of important questions in labor economics, including the source of the experience profile of wages, the response of job changes to outside wage offers, and the effects of seniority on job changes. We also study the dynamic response of wage rates, hours, and earnings to various shocks, and measure the relative contributions of the shocks to the variance of earnings in a given year and over a lifetime. We find that human capital accounts for most of the growth of earnings over a career, although job seniority and job mobility also play significant roles. Unemployment shocks have a large impact on earnings in the short run, as well as a substantial long‐term effect that operates through the wage rate. Shocks associated with job changes and unemployment make a large contribution to the variance of career earnings and operate mostly through the job‐specific error components of wages and hours.     

Wage Dynamics and Unemployment in Germany: Evidence from Regional Panel Data

A stylized fact of empirical work on the relationship of wages and unemployment using macro data for European countries is a combination of strong autocorrelation of wages and a significant negative long‐run relationship of wages and unemployment. However, this view is challenged by empirical work relying on regional or micro data providing evidence for an instantaneous adjustment of wages to variations in the level of unemployment. Exploiting regional panel data for West Germany, we show that, at least for the years 1990–94, regional and macro data mirror the same phenomenon. Our results are broadly consistent with the observed increase in the natural rate of unemployment in Germany.     

Firing Costs,Efficiency Wages and Unemployment

This paper uses a Shapiro–Stiglitz efficiency wage model to analyse the effects of firing costs on wages, employment, expected utility and profits. It considers that the probability of a non–shirker being fired depends on an exogenous shock which follows a two–state Markov process. It finds that higher severance payments give rise to lower wages, a lower unemployment rate, an increase in firms’ profits and a decrease in the utility of both workers and the unemployed. These conclusions derive from the finding that a greater probability of keeping one’s job, because of higher firing costs, raises the value of the job and reduces the worker’s incentives to behave opportunistically; this enables firms to reduce wages. Hence, if firms pay efficiency wages, a higher degree of labour market flexibility increases unemployment.     

Wage Bargaining with On‐the‐Job Search: Theory and Evidence

Most applications of Nash bargaining over wages ignore between‐employer competition for labor services and attribute all of the workers' rent to their bargaining power. In this paper, we write and estimate an equilibrium model with strategic wage bargaining and on‐the‐job search and use it to take another look at the determinants of wages in France. There are three essential determinants of wages in our model: productivity, competition between employers resulting from on‐the‐job search, and the workers' bargaining power. We find that between‐firm competition matters a lot in the determination of wages, because it is quantitatively more important than wage bargaining à la Nash in raising wages above the workers' “reservation wages,” defined as out‐of‐work income. In particular, we detect no significant bargaining power for intermediate‐ and low‐skilled workers, and a modestly positive bargaining power for high‐skilled workers.     

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.     

Heterogeneous Firm Responses to Rising Teenage Wages

Substantial youth minimum wage changes in New Zealand between 2000 and 2007 raised teenage average wages by 5–10 per cent relative to those for adults. We use Statistics New Zealand's Linked Employer–Employee Database (LEED) to examine whether firms' teenage labour demand responses to these changes are greater for firms with higher teenage‐employment share. We find evidence that high teen‐employers reduced their teen employment relative to other firms and had lower survival rates over the period. However, firms that entered the main teen‐employment industries had higher teen‐employment shares than continuing firms. The results are consistent with endogenous technology adoption in response to non‐marginal changes in relative wages.     

Social Capital and Wages: An Econometric Evaluation of Social Networking's Effects

Abstract. The goal of this paper is to get an econometric evaluation of the effects of the social network's mobilization, as a job search strategy, on wages. We make use of switching regression models to deal simultaneously with an endogenous selection issue in the network's choice and the existence of two different regimes of wage determination. Econometric estimates provide evidence for the existence of a selection effect on the choice of network but, after correcting the selection bias on the wage equations, the effect of social network on wages is negative.     

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.     

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.