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.     

Earnings‐related Severance Pay

Abstract. In an efficiency wage economy, lump‐sum severance pay from which shirkers can be excluded raises employment. However, severance payments are usually related to wages. It is shown that earnings‐related, mandated severance pay will have ambiguous employment effects if effort can be varied continuously. A substitution of the earnings‐related for the lump‐sum component reduces employment. Thus, the prevalent form of severance payments in OECD countries might have less advantageous employment effects than previously conjectured.     

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.     

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.     

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.     

Job Tenure,Labour Mobility and Wage Profiles

Abstract. The features and the length of the attachment of workers to firms represent a central aspect of the labour relationship. The length of service is an important determinant of wages and of non-pecuniary benefits; it affects internal mobility in the firm, and insulates workers with long job tenure from unemployment. In this paper it is argued that the traditional “spot” labour market Characterization is difficult to reconcile with the existence of long term employment relationships. A number of alternative theories which predict the existence of an employer-worker attachment proposed, and their implications discussed. The relevance of long term employment relationships is then tested using micro-data for the Italian manufacturing industry. An appropriate methodology for the analysis of the duration of employment is developed. and separate “job tenure” equations for white and blue collar workers are estimated. A higher educational attainment - ceteris paribus- appears to increase the probability of a job separation; conversely, a higher working experience, previous to the current job, tends to reduce it. The effect of firm size is negative, as larger organizations seem to favour longer employment spells. Outside opportunities show a strong positive effect on the probability of separation. Finally, conditional on the current wage, the probability of leaving the job increases with the length of time worked. However, when the unconditional outcome is considered, separation decline with tenure; in this case. it is argued, the wage effect more than outweighs the conditional effect. This result is consistent with the predictions of both “specific” human capital and job matching theories.     

Efficient Labour Contracts: Impediments and How to Circumvent Them

Efficient labour contracts on wages and employment could contribute to a reduction in unemployment in Europe. Their implementation is hindered by institutional settings and asymmetric incentives at different levels of the bargaining process. Employed workers have no incentives to forego wage increases at the firm level for potential employment gains, while employers’ federations possess no means to guarantee an employment increase for the sector covered by a wage agreement. Decentralization of wage bargaining does not solve this incentive problem. It is demonstrated that the introduction of marketable certificates may reduce the asymmetric incentive effects enabling contracts with higher employment.     

Is the Labour Market Adjustment in Poland Surprising?

Abstract. On the basis of the brief review of developments in employment and wages in Poland during the stabilization program in 1990, this paper tries to provide critical comments on the two often expressed opinions: that the fall in employment was surprisingly small compared to the fall in output, and that the tax-based incomes policy played a major role in forcing a huge drop in real earnings. It is argued that the actual proportions of the fall in output and employment were in line with specific features of the “overheated” shortage economy, which existed prior to the stabilization program. Since wages were not a “nominal anchor” for most of 1990, other reasons for the astonishing downward flexibility of real wages are analyzed. It is suggested that during the labour market adjustment, the rational strategy of employees was to accept a large, real wage cut in exchange for keeping their employment. Contrary to widespread opinion, it might also be argued that incomes policy, in a short and medium run, will play a much more important role in containing wage pressure than it has until now.     

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.     

Standard of Living as a Right,Not a Privilege: Is It Time to Change the Dialogue from Minimum Wage to Living Wage?

Dating back to the 1930s, President Franklin D. Roosevelt argued that workers were entitled to a wage that allowed them to enjoy a decent standard of living—a conviction that led the president to propose the first federally‐mandated minimum wage. Mr. Roosevelt’s proposal was met with highly partisan resistance in congress and the courts—reactions not different in kind from the highly partisan resistance former President Obama experienced in his proposal to increase the federal minimum wage from its current level of $7.25 per hour. Reflecting President Roosevelt’s convictions, it is clear that many low wage workers today are not, and cannot, enjoying a decent standard of living at current minimum wage levels. Further, many of the economic arguments raised in opposition to increasing the minimum wage have been thoroughly discredited: empirical evidence suggests that increased minimum wages would not lead to dramatic spikes in unemployment, massive substitutions of capital for labor, business closings, and significantly increased consumer prices. However, as compelling as arguments for increasing the minimum wage may be, the reality is that this may not be sufficient to alleviate the plight of low income workers, particularly given the political nature of minimum wage adjustments. Indeed, it may be time to shift the national focus away from the minimum wage to an emphasis on viable living wage legislation, a proposition consistent with the social justice perspective of contemporary ethicists.     

Inequality and Unemployment in a Global Economy

This paper develops a new framework for examining the determinants of wage distributions that emphasizes within‐industry reallocation, labor market frictions, and differences in workforce composition across firms. More productive firms pay higher wages and exporting increases the wage paid by a firm with a given productivity. The opening of trade enhances wage inequality and can either raise or reduce unemployment. While wage inequality is higher in a trade equilibrium than in autarky, gradual trade liberalization first increases and later decreases inequality.     

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.     

Productivity,Real Wages and Worker Rights: A Cross-National Comparison

ABSTRACT: High unemployment in Europe has led many economists to recommend labour market deregulation — the removal of obstacles to labour market flexibility. These “obstacles” include union power, employment protection legislation and income security arrangements. We argue that such worker rights promote productivity and real wage growse effects. Policy-makers should be aware of these positive effects on productivity and real wage growth when considering curtailing worker rights in order to reduce unemployment.     

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.     

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.     

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.     

Explicit versus Implicit Profit Sharing and the Determination of Wages:

ABSTRACT: This paper considers the claim that explicit profit sharing reduces the marginal cost of labour This is contrasted with the view that implicit profit sharing occurs through wage bargaining Using a microeconomic data set from the UK we find no evidence that the introduction of profit sharing reduces base wages and hence the marginal cost of labour However firm profitability is found to have a positive effect on wages which supports the hypothesis of implicit profit sharing through wage bargaining These findings suggest that it is hard to justify the favourable tax treatment of profit related pay found in the UK     

Better Safe than Sorry? The Effects of Income Risk and Unemployment Risk on Wages

We study the effects of income risk and unemployment risk on individual wages simultaneously. Starting point for the empirical analysis is a portfolio model for the labor market. This model shows positive wage effects for both risks but also a negative interaction effect. Using German administrative panel data we estimate the effects of the income risk, the unemployment risk and their interaction on individual wages separately for men and women in East and West Germany. We find the expected positive wage effects for both risks as well as a negative interaction effect. The marginal effect of income risk on wages is positive, whereas the marginal effect of unemployment risk 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.