Union-nonunion wage differentials and the functional distribution of income: Some simulation results from a general equilibrium model

During the past two decades, a number of studies have established the ability of unions to obtain wages for their members that exceed the payment to similar but nonunionized workers. This article investigates empirically the impact that this wage differential has on the real incomes of union labor, nonunion labor, and capital. The analysis is accomplished by solving explicitly a numerically specified general equilibrium system with and without the union wage premium. Comparison of real factor incomes in each equilibrium yields the desired information. The findings indicate that union labor gains as a result of the differential, while nonunion labor and capital lose. This outcome is realized both in terms of real income levels and in a redistributive sense. I would like to thank Nick Carlozzi and Aris Protopapadakis for valuable comments and Mary Agnes McPeak for excellent research assistance. Remaining errors are my responsibility alone.     

Economywide Impact of Maize Export Bans on Agricultural Growth and Household Welfare in Tanzania: A Dynamic Computable General Equilibrium Model Analysis

Export bans have been frequently used by developing countries in recent years in an attempt to ensure domestic food supplies and insulate domestic market prices from international price hikes. This article uses Tanzania to examine the impact of export bans using a computable general equilibrium model. We find that banning cross‐border maize exports has very little effect on the national food price index and that the benefits from lower maize prices are captured primarily by urban households, while maize producer prices decrease significantly. The export ban further decreases the wage rate for low‐skilled labour and the returns to land, while returns to non‐agricultural capital and wage rates for skilled labour increase, further hurting poor rural households and thus increasing poverty for the country as a whole.     

A MODEL and SOME EVIDENCE CONCERNING THE INFLUENCE OF DISCRIMINATION ON WAGES

The observed wage gap between men and women is widely attributed to discrimination in the workplace. Yet within the context of the standard neoclassical framework, discrimination is neither a necessary nor sufficient condition. This paper presents a modified neoclassical model which supports equilibrium wage differentials and which has testable implications. The paper also surmounts a difficulty that has plagued many earlier assessments–separating prejudice from other explanations of the wage gap. By directing attention away from wages to other implied effects of discrimination, our model offers cleaner tests of the impact of prejudice in labor markets. Results of such tests are reported.     

MINIMUM WAGE EFFECTS WITH OUTPUT STABILIZATION

What are the effects of legal minimum wage rates on the U.S. economy? Does minimum wage legislation promote the economic self-interest of high wage union labor and impede the economic self-interest of capitalists as our earlier research [Cox and Oaxaca 1982] suggested? This paper uses a nine sector econometric/simulation model of U.S. industry from 1975–1978 to answer these questions in the context of stabilization policies which hold aggregate real output constant. While most simulated percentage effects are small, those for the unskilled workers themselves are not. A 15.7 percent increase in the average nominal wage rate of unskilled labor, as a result of minimum wage legislation, produced an 11 percent decrease in unskilled employment, 2.2 million jobs lost, while increasing the real wage of unskilled workers by 15 percent. Simulated changes in several key variables support our earlier observations that the self-interests of labor unions, with skilled workers, conflict with those of capitalists over the issue of minimum wage legislation.     

Transitional appreciation of equilibrium exchange rates and the ERM II

A suitable parity for exchange rate fixing can be derived from an analysis of the equilibrium exchange rate. As the equilibrium exchange rates of the new EU 5 countries, the Czech Republic, Hungary, Poland, Slovenia, and the Slovak Republic, tend to exhibit appreciation trends, credibility of the potential commitment to fixed exchange rate parity with respect to the euro can be undermined. In order to investigate this issue, we estimate a behavioral model of real exchange rates for EU 5 countries and derive the respective equilibrium real exchange rates. Using the linear-quadratic filter we estimate permanent equilibrium exchange rates and their stationary points. We find that as of 2004 fixing of the national currencies to the euro should not be undermined by further significant trend appreciation in the equilibrium exchange rates of the EU 5 countries, in aggregate.     

Minimum wages and poverty with income-sharing

Textbook analysis tells us that in a competitive labor market, the introduction of a minimum wage above the competitive equilibrium wage will cause unemployment. This paper makes three contributions to the basic theory of the minimum wage. First, we analyze the effects of a higher minimum wage in terms of poverty rather than in terms of unemployment. Second, we extend the standard textbook model to allow for income-sharing between employed and unemployed persons in society. Third, we extend the basic model to deal with income sharing within families. We find that there are situations in which a higher minimum wage raises poverty, others where it reduces poverty, and yet others in which poverty is unchanged. We characterize precisely how the poverty effect depends on four parameters: the degree of poverty aversion, the elasticity of labor demand, the ratio of the minimum wage to the poverty line, and the extent of income-sharing. Thus, shifting the perspective from unemployment to poverty leads to a considerable enrichment of the theory of the minimum wage.      

INFLATION DYNAMICS AND LABOR MARKET SPECIFICATIONS: A BAYESIAN DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM APPROACH FOR JAPAN'S ECONOMY

Which labor market specification is better able to describe inflation dynamics, a widely used sticky wage model or a recently investigated labor market search model? Using a Bayesian likelihood approach, we estimate these two models with Japan's data. This article shows that the labor market search model is superior to the sticky wage model in terms of both marginal likelihood and out‐of‐sample forecast performance, particularly regarding inflation. The labor market search model is better able to replicate the cross‐correlation among inflation, real wages, and output in the data. Moreover, in this model, real marginal cost is determined by both hiring cost and unit labor cost that varies with employment fluctuations, which gives rise to a high contemporaneous correlation between inflation and real marginal cost as represented in the New Keynesian Phillips curve. (JEL E24, E32, E37)     

LABOR MARKET DYNAMICS WITH SEARCH FRICTIONS AND FAIR WAGE CONSIDERATIONS

Fairness considerations in wage setting can improve the ability of the Diamond‐Mortensen‐Pissarides search and matching model to account for U.S. labor market dynamics. Firms' production is influenced by workers' effort input, which depends on whether workers consider the employment relation as fair. A typical worker's effort is determined in a comparison of individual current wage with wage norms, including the outside option, the individual past wage, and the wage level in the steady state. The fairness considerations in the search framework give rise to endogenous real wage rigidity, and realistic volatilities of unemployment, vacancies, and labor market tightness. (JEL E24, E32, J64)     

Unions and unequal pay: The establishment of the “family wage”

Equal pay laws in many OECD countries establish the right of men and women to equal pay for work of equal value. Nevertheless, during the first half of the 20th century, before the enactment of equal pay laws, employers and unions in several countries promoted unequal pay through “family wage” arrangements. This article seeks to improve understanding of the historical and sociological origins of “family wage” arrangements through both comparative research and in‐depth historical archival research on family wage arrangements in Israel. It shows that unions played a complex role in promoting family wage arrangements. While their action refected their patriarchal understanding of society, they were also guided by socialist principles.     

INDUSTRIAL OUTPUT VARIABILITY AND REAL WAGE FLUCTUATIONS: DETERMINANTS AND IMPLICATIONS

The cyclical behavior of the real wage differentiates between the empirical validity of major new Keynesian sticky-wage and sticky-price explanations of business cycles. Across industries of the United States, an increase in price flexibility relative to wage flexibility correlates with a reduction in output fluctuations in the face of demand shocks. Further, industrial real output variability does not vary significantly with nominal wage flexibility. In contrast, an increase in price flexibility moderates industrial real output variability. Consistently, an increase in the real wage response to demand shocks correlates with an increase in industrial output variability. ( JEL E32, E31)     

Labor market adjustments in the unionized contract construction industry

The unionized construction labor market reaches equilibrium by means of three adjustment mechanisms: wage changes, changes in the quality of workers hired, and the migration of workers in and out of the market. The relative importance of the three mechanisms in local labor markets depends on laws and institutional rules. This paper examines some of the important institutional rules and presents a model of market clearning where wage adjustments are infrequent.     

Can a minimum wage increase have an adverse impact on inequality? Evidence from two Latin American economies

This paper uses a semiparametric model to analyze the impact of an increase in the real minimum wage on inequality in Colombia between 1995 and 1999 and in Paraguay between 1993 and 2000–2001. Simulations suggest that if the employment effects of the minimum wage increase are ignored, the underlying policies would contribute to reduce earnings inequality in Colombia and would be inequality neutral in Paraguay. By considering the drop in wages of those who lost their jobs, simulations suggest that in both countries the policy in question would increase earnings inequality under some assumptions about the employment elasticity of the minimum wage and the new level of earnings unemployed workers rely upon. While these findings do not mean that minimum wage increases in LDCs (Less Developed Countries) necessarily have adverse distributional affects, they suggest that minimum wage policy should be implemented with care depending on how sensitive employment is to wage increases. An erratum to this article can be found at     

SKILLED‐UNSKILLED WAGE INEQUALITY AND URBAN UNEMPLOYMENT

The impact of trade liberalization on the labor market in the North has drawn tremendous attention in the face of the growing skilled‐unskilled wage gap but in the South it has been somewhat neglected. One of the key structural differences between the North and the South is that the South experiences a pronounced rural‐urban migration in the presence of urban unemployment. We introduce this feature in the structure of a simple general equilibrium model to analyze the effects of trade liberalization and fragmentation on employment and the skilled‐unskilled wage differential in the South. In particular, we show that while fragmentation necessarily improves the unskilled wage and the skilled wage, more lucrative global opportunities for the skilled final product, in the absence of fragmentation, can reduce the rural wage and increase urban unemployment. The effect of fragmentation, ceteris paribus, on the skilled‐unskilled wage gap is sensitive to the degree of substitutability between land and unskilled labor. As such, fragmentation can magnify the increase in the skilled‐unskilled wage gap resulting from an improvement in the terms of trade. It is also shown that a technological progress in the intermediate goods sector increases the skilled‐unskilled wage gap and raises urban unemployment. (JEL F1, O1, F11, F12)     

EFFICIENCY WAGES AND EQUILIBRIUM WAGES

We present a labor market model that allows as special cases a market paying equilibrium wages, one paying disequilibrium efficiency wages, and a market combining the two. Our analysis indicates that industrial wage differentials are not necessarily evidence of efficiency wages. Such differentials may be explained by differences across industries in labor performance standards or in the accuracy with which worker effort can be measured. We do find, however, that the relationship between wages and dismissals can be used to distinguish a market paying equilibrium wages from one paying efficiency wages.     

Intertwining Gender Inequalities and Gender‐neutral Legitimacy in Job Evaluation and Performance‐related Pay

This article analyses the intertwining inequalities in wage determination and the gender‐neutral legitimacy that pay systems provide by masking these inequalities. Job evaluation and performance‐related pay were originally designed for purposes other than promoting equal pay, namely as managerial tools for determining wage levels. Typically, the main objective of a pay system is not to promote equal pay. Still, as a tool for assessing the value of work, job evaluation is regarded as a central method in promoting equal pay. The use of job evaluation is recommended by the European Commission and the International Labour Organization, and often features in gender‐equality policy and legislation. In contrast with the status of job evaluation, little research exists on performance‐related pay and gender pay equity. The findings show that the wages determined by pay systems reflect gendered cultural valuations of jobs and occupations. Pay systems provide gender‐neutral legitimacy for gender‐based wage disparities.     

It does (not) get better: Reference income violation and altruism

We experimentally test whether the gap between reference and actual income impacts subsequent altruism. Participants first perform a real-effort task for a fixed wage and then play a dictator game. Between conditions, we vary the level and the timing of the revelation of the wage. In some conditions, participants know the wage before the real effort task and are not informed of the other potential levels. In some other conditions, they are informed of the distribution of wages before the real effort task, but the actual wage is only revealed afterward. Participants in the latter conditions can form references that may be higher or lower than their actual wage. Our hypothesis is that the gap between the reference and the actual wage impacts transfers in the subsequent dictator game, either because participants want to compensate their recent losses, or because of the emotional reaction to gains and losses. The results support this hypothesis: participants who get the low wage transfer less and are less likely to transfer when they are informed of the other potential levels than when they are not. Conversely, participants who get the high wage are more likely to transfer positive amounts when they are informed of the other potential levels. We use physiological (skin conductance response) and declarative data to discuss the role of emotions in our treatment effects.     

A Stochastic Monopsony Theory of the Business Cycle

Two distinct regimes, contractions and expansions, are generated in a model in which goods markets clear and all individuals are optimizing, strict wage and price takers, have fully rational expectations, and are heterogeneous in both preferences and resource endowments. Involuntary unemployment, asymmetric monetary policy effectiveness, and a changing relationship between real wages and employment over the business cycle are the result of optimizing behavior by monopsonistic, wage-setting, and price-taking firms faced with price uncertainty, an upward-sloped supply of employees, and efficiency wage behavior. Disequilibrium and involuntary unemployment can occur at the level of the individual firm's labor market.     

Work hours,social value of leisure and globalisation

We examine how openness interacts with the coordination of consumption–leisure decisions in determining the equilibrium working hours and wage rate when there are leisure externalities (e.g., due to social interactions). The latter are modelled by allowing a worker's marginal utility of leisure to be increasing in the leisure time taken by other workers. Coordination takes the form of internalising the leisure externality and other relevant constraints (e.g., labour demand). The extent of openness is measured by the degree of capital mobility. We find that: coordination lowers equilibrium work hours and raises the wage rate; there is a U-shaped (inverse-U-shaped) relationship between work hours (wages) and the degree of coordination; coordination is welfare improving; and, the gap between the coordinated and uncoordinated work hours (and the corresponding wage rates) is affected by the extent and nature of openness.     

THE RELATIVE STICKINESS OF WAGES AND PRICES

While many modern business cycle theories posit the existence of nominal wage and/or output price stickiness, their relative importance remains an unsettled issue. Using a structural VAR model, this paper exploits evidence on the behavior of real wages to assess the relative importance of these two sources of stickiness. The empirical results suggest that a positive shock to aggregate demand causes a significant temporary fall in real wages. This is taken as evidence that sticky wages have played a more important role than sticky prices in transmitting aggregate demand shocks to real economic activity in the post-war U.S. (JEL E32)