Unemployment Benefits and Employment Policies in the Presence of a Strong Trade Union: A Comparison

Abstract. The paper analyses, within a game theoretic approach, the consequences on private employment and real wages of a government policy of raising unemployment benefits following a fall in employment. The effects of such a policy are then compared with those arising from a more conventional demand policy. Under the policy regime described the reaction of the unions will cause, when the economy is hit by a negative shock on employment, a tendency for the real wage to rise and for private employment to decrease further. As far as the comparison of such policy with a policy of direct employment by the government is concerned we have reached the following conclusions. A policy based on unemployment benefit will give rise to a smaller increase in the real wage than a policy based on public employment if the change in the marginal utility of being employed due to change in the unemployment benefit is smaller than the utility that the union will obtain from an extra employed person. Moreover it appears that a policy based on unemployment benefits has a smaller negative effect on private employment, than a policy based on direct employment. if such a policy is adopted just after an employment benefits represent also a subsidy to the firms. We have shown that the effects on the real wage of the Policy rule considered are in this case stronger. The effects on employment depend on the relative strength of the union reaction and of the policy's supply side effects.     

The Role of Entrepreneurship in the Context of Career Trajectories: Moving Back into Wage Employment or into Unemployment?

This study investigates patterns of movement from self‐employment to wage employment or to unemployment in Belgium. Non‐parametric techniques and complimentary log–log analyses are used to determine the significance of stable individual traits (e.g. gender) and of time‐dependent characteristics (e.g. family and organizational context, labour market mobility) in moving back to wage employment or to unemployment. Evidence is provided on the possibility of entrepreneurship acting as a ‘steppingstone’ between long‐term unemployment and paid work. Yet, significant relationships also emerge between ex‐ante time spent in unemployment and the possibility of continued unemployment upon self‐employment exit.     

THE RETURN OF THE WAGE PHILLIPS CURVE

The standard New Keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment. Under some assumptions, that relation takes a form similar to that found in empirical wage equations—starting from Phillips’ (1958) original work—and may thus be viewed as providing some theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the US economy, even under the strong assumption of a constant natural rate of unemployment.     

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.     

DO FINANCIAL INCENTIVES AFFECT FIRMS’ DEMAND FOR DISABLED WORKERS?

A number of OECD countries aim to encourage work integration of disabled persons using quota policies. For instance, Austrian firms must provide at least one job to a disabled worker per 25 nondisabled workers and are subject to a tax if they do not. This “threshold design” provides causal estimates of the noncompliance tax on disabled employment if firms do not manipulate nondisabled employment; a lower and upper bound on the causal effect can be constructed if they do. Results indicate that firms with 25 nondisabled workers employ about 0.04 (or 12%) more disabled workers than without the tax; firms do manipulate employment of nondisabled workers but the lower bound on the employment effect of the quota remains positive; employment effects are stronger in low‐wage firms than in high‐wage firms; and firms subject to the quota of two disabled workers or more hire 0.08 more disabled workers per additional quota job. Moreover, increasing the noncompliance tax increases excess disabled employment, whereas paying a bonus to overcomplying firms slightly dampens the employment effects of the tax.     

Unemployment Insurance Policy and Union Wage Formation

Abstract. The paper considers the wage and employment effects of alternative social security policies. Such a policy can take the form of a fixed benefit level or linking the level of unemployment benefits to private sector wages. The latter is an important social security policy instrument to guarantee an equitable distribution of income. A fixed benefit level policy yields lower wages and larger employment than an automatic link between the level of benefits and the wage rate. Further, if the government decides to make the link conditional on the stabilization of the tax rate, wages are lower and employment is higher than in both former alternatives. By endogenizing its social security policy, the government is able to reduce the loss in employment that the link policy brings about.     

Underemployment Benefit Effects on Employment and Income Distribution: What We Should Learn from the System of the Cassa Integrazione Guadagni

ABSTRACT: Two aspects distinguish the Cassa Integrazione Guadagni (CIG) from most other European under or unemployment public benefit schemes: an institutionally fixed replacement ratio and a rotation principle imposing a labour-sharing regime. Within a labour-sharing approach, the comparison between the CIG unitary subsidy proportioned to the corresponding wage rate and the European standard fixed in nominal terms, shows that, ceteris paribus, employment is lower and profits are higher in the former system. Moreover, given the indexation provided by CIG, aggregate supply is vertical in this system while it is positively sloped in the other. Consequently, employment, real profits and real wages are constant in the former case, while they are positively correlated to the good quality of the states of nature in the latter. If the tax-based financing of public benefits is not — as it is not in Italy — experience-rated, the CIG regime induces moral hazard behaviours harmful to the State: it leads firms and unions to agree on relatively high wages, thus raising the value of both working and non-working time. Without affecting the unions’average requests and the firms’profits, this attitude reduces employment and increases under or unemployment public subsidies.     

The Role of Profit Sharing in Dual Labour Markets with Flexible Outsourcing

We combine profit sharing for high‐skilled workers and outsourcing of low‐skilled tasks in a partly imperfect dual domestic labour market, which means that only low‐skilled labour is represented by a labour union. In that framework we analyse how the implementation of profit sharing for high‐skilled workers influences the amount of outsourcing and the labour market outcome for low‐skilled worker. By doing this, we use some specific assumptions, e.g. exponentially increasing outsourcing costs or the wage for low‐skilled workers will be determined by a union whereas the wage for high‐skilled workers is given. Assuming that low‐skilled labour and outsourcing are interchangeable we show that profit sharing has a positive effect on the wage for low‐skilled workers and helps to decrease wage dispersion. However, under these circumstances, profit sharing enhances outsourcing. Concerning the employment effects for high‐ and low‐skilled workers, we show that there is an employment reducing effect due to higher wages for low‐skilled work, which can be offset by higher productivity of highly skilled workers, as the domestic labour inputs complement each other.     

Union Bargaining,Wage Differentials and Employment

Abstract. Reviewing empirical studies concerning the corporatism-flexibility-performance nexus the paper discusses decentralized and centralized bargaining systems. Revenue pay systems, concession bargaining and two-tier wage systems as means to enhance wage flexibility at the firm level are also considered. Both theoretical and empirical evidence is presented, showing that unions are bargaining for greater employment security for the already employed (the insiders). In return, unions are ready to accept greater wage flexibility and even wage decreases. By contrast, the insider-outsider theory does suggest how unions may accentuate involuntary unemployment, because there may be ways in which a union can help to raise the wages of the insiders without reducing their chances of continued employment.     

Country-of-origin determinants of foreign direct investment in an emerging market: the case of Mexico

Foreign direct investment (FDI) research has generally focused on inward FDI to large, developed nations. Very limited research has examined the country-of-origin factors that are related to FDI into the developing nations (emerging markets) that are becoming increasingly important in the global economy. In this paper, we provide the first empirical test of a multidimensional, country-of-origin model of factors related to FDI in an emerging market — Mexico. Economic, socio-political, and geographic factors are hypothesized to be important country-of-origin determinants of FDI into Mexico. The results indicate that some factors, such as the level of bilateral trade, home-country GDP, political risk, geographic distance, and exchange rates, are related to FDI into Mexico. At the same time, relationships between FDI and country-of-origin factors, such as market size (GDP) and cultural distance, that have previously held in research on FDI to large, developed nations do not hold in the same way in the emerging market context. Separate consideration of efficiency-seeking (maquila) FDI indicates that bilateral trade, wage rate, GDP, and the exchange rate contribute significantly to the explanation of inward FDI in Mexico.     

Welfare Effects of Local versus Central Wage Bargaining

The paper analyses the welfare effects of union bargaining (de)centralization in a dual labour market with a unionized and a competitive sector. We show that social welfare depends on both the structure of the union's objective function and the elasticities of labour demand in both sectors. The welfare‐maximizing employment allocation can be obtained under a high degree of centralization if the union maximizes the total wage‐bill. Otherwise, if the union is rent maximizing, welfare is higher under local bargaining. However, in that case neither central nor local wage setting yields the social optimum.     

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.     

Unions and the Welfare Impact of Foreign Direct Investment — A Wisdom Extension

Abstract. This paper extends the recent literature, e.g. Leahy and Montagna (Economic Journal 110: 80–92, 2000), in relation to the link between unionization, inward foreign direct investment (FDI) and country welfare in an oligopoly market structure. It is shown that the common results, that unions may reduce welfare under FDI while multinational enterprises (MNEs) will strictly trade off union wages at each location, are generally driven by the assumption relating to the scope of the bargaining with the union, namely the ‘right to manage’ (RTM). In particular, our extension to efficient bargaining (EB) demonstrates that union power may increase welfare in the presence of FDI, while the MNEs’ choice between FDI and exports will include profit‐sharing arbitrage with unions, in addition to the usual wage comparison considerations.     

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.     

Labour Market Regulation,Flexibility and Employment

ABSTRACT: Chronic unemployment and slow employment growth in some countries have led to calls for more labor-market “flexibility”. This paper defines the flexibility issue in terms of legally-mandated “severance”, a generalized employment cost linked to seniority. A mandated severance benefit can stand for a variety of programs including employer-provided employment guarantees, payments which must be made to laid-off workers, and compensation for wrongful discharge. Such a mandated cost can be seen as a payroll tax on the employer, raising the issue of tax incidence. Employers often take the view that labor costs are given and that mandated costs are simply add-ons to pre-existing cost levels. However, the literature on tax incidence suggests that a significant portion of “employer-paid” payroll taxes are shifted to labor in the form of lower wages. Such shifting should reduce the dis-employment effects attributed to severance. A model is provided of a firm upon which a severance mandate is imposed. Even at the micro level, the firm can shift some of the cost of severance to employees by lowering wages — although at the expense of higher turnover costs associated with increased quit rates. At the macro level, to the extent that firms reduce employment, there could be still further downward wage adjustments which would shift the severance burden to labor and mitigate the dis-employment effect. Ultimately, if the natural rate of unemployment is raised by severance mandates, the age-old question is raised of why wages do not fall in the face of labor surpluses. The true inflexibility to be explained, therefore, is in wage determination.     

Job Matching and the Wage Distribution

This paper brings together the microeconomic‐labor and the macroeconomic‐equilibrium views of matching in labor markets. We nest a job matching model à la Jovanovic (1984) into a Mortensen and Pissarides (1994)‐type equilibrium search environment. The resulting framework preserves the implications of job matching theory for worker turnover and wage dynamics, and it also allows for aggregation and general equilibrium analysis. We obtain two new equilibrium implications of job matching and search frictions for wage inequality. First, learning about match quality and worker turnover map Gaussian output noise into an ergodic wage distribution of empirically accurate shape: unimodal, skewed, with a Paretian right tail. Second, high idiosyncratic productivity risk hinders learning and sorting, and reduces wage inequality. The equilibrium solutions for the wage distribution and for the aggregate worker flows—quits to unemployment and to other jobs, displacements, hires—provide the likelihood function of the model in closed form.     

Earning While Learning: When and How Student Employment is Beneficial

Although studies of student employment (‘earning while learning’) mostly find positive wage effects, they do not adequately consider the relation of the employment to the field of study. We investigate how different types of student employment during tertiary education affect short‐ and long‐term labour market returns. Beyond examining differences between non‐working and part‐time working students, we distinguish between student employment related and unrelated to the field of study. Our results show significant positive labour market returns of ‘earning while learning’ only for student employment related to the field of study. These returns consist of a lower unemployment risk, shorter job‐search duration, higher wage effects, and greater job responsibility.     

Unemployment May Be Lower if Unions Bargain over Wages and Employment

This paper addresses the question under which circumstances unemployment can be lower if unions bargain over wages and employment in a general equilibrium framework. Thereby, it turns out that the unemployment rate may negatively depend on the wage rate, if the unemployment compensation scheme contains a constant real term in addition to the replacement ratio component. This is, compared with a pure replacement ratio scheme, the more plausible formalization of the real world’s compensation systems, at least for European countries. Besides the theoretical analysis, the paper also derives political implications by identifying the relevant parameters for the decision on whether weakening unions will be a good strategy for an economy to overcome its unemployment problem.     

THE POLITICAL ECONOMY OF FLEXICURITY

We document the presence of a trade‐off in the labor market between the protection of jobs and the support offered to unemployed people. Different countries’ locations along this trade‐off represent stable political‐economic equilibria. We develop a model in which individuals determine the mix of job protection and support for the unemployed in a political environment. Agents are heterogeneous along two dimensions: employment status (insiders and outsiders) and skills (low and high). Unlike previous work on the political economy of labor market institutions, we emphasize the role of job protection and unemployment benefits in the wage‐setting process. A key implication of the model is that flexicurity configurations with low levels of job protection and high levels of support to the unemployed should emerge in the presence of a highly educated workforce. Panel regressions of countries’ locations along this institutional trade‐off are consistent with the implications of our model.