Self‐financing Unemployment Insurance and Bargaining Structure

Abstract. This study examines how the size of trade unions relative to the labor force impacts on the desirability of different organizational forms of self‐financing unemployment insurance (UI). For this purpose, we compare the outcome of a model with a uniform payroll tax to a model where workers pay taxes according to their systematic risk of unemployment. Our results highlight the importance of the bargaining structure for the assessment of a particular UI scheme. Most importantly, it depends on the relative size of the unions whether efficiency favors a uniform or a differentiated UI scheme.     

STAUNCHING EMIGRATION FROM EAST GERMANY: AGE AND THE DETERMINANTS OF MIGRATION

Following the unification of Germany in 1990, eastern wages and unemployment both rose rapidly. I demonstrate that rising wages reduced eastern emigration greatly, while rising unemployment had little effect. This reflects the behavior of the young, who are very sensitive to source region wages, and relatively insensitive to source unemployment. I show that most of the effect of source unemployment comes from the contemporaneous effect on those laid‐off, who are more likely to be older. I find that, compared to stayers, young emigrants are much more skilled, older emigrants are slightly more skilled, and commuters are not more skilled, as measured by education and pre‐move wages. My conclusions are based on a comparison of results from aggregate inter‐state migration data and individual data from the eastern sample of the German Socio‐Economic Panel for 1990–2000. (JEL: J61, P23)     

Occupational Upgrading and the Business Cycle

Many economics theories suggest that the assignment of workers to occupations changes over the business cycle: expansions allow workers to upgrade to occupations that pay higher wages and require more skill. This paper provides some empirical evidence from the USA that such upgrading does occur and that, as predicted, it has greater effects on less‐skilled individuals. Furthermore, the skill composition of new hires changes over the business cycle, even within occupations. Consistent with a job competition model, the education levels of new hires within occupations are higher when the unemployment rate is high and this effect is more pronounced in lower‐paying occupations. The changes in assignment imply that low‐skilled individuals suffer most from recessions in terms of occupation quality and unemployment. The results are consistent with employers responding to a greater supply of educated workers by increasing hiring standards, and so imply that the social return to education may be lower than the private return. However, the results are also consistent with more neo‐classical models of the labor market.     

Low‐wage Jobs — Springboard to High‐paid Ones?

We examine whether low‐paid jobs have an effect on the probability that unemployed persons obtain better‐paid jobs in the future (springboard effect). We make use of data from the German Socio‐Economic Panel (SOEP) and apply a dynamic random effects bivariate probit model. Our results suggest that low‐wage jobs can act as springboards to better‐paid work. The improvement of the chance to obtain a high‐wage job by accepting low‐paid work is particularly large for less‐skilled persons and for individuals who experienced longer periods of unemployment. Low‐paid work is less beneficial if the job is associated with a low social status.     

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.     

A Social Welfare Theory of Trade Unions

There have been recent advances in the understanding of trade unions by modeling union objectives as maximizing a neoclassical utility function. While this literature is most relevant for autonomous and homogeneous local unions, there are also numerous large, heterogeneous trade unions in many countries. This paper illustrates that social choice theory presents a more realistic framework for explicitly modeling the aggregation of potentially diverse preferences within trade unions.     

Trade Union Preferences in Double Dividend Models

This paper analyses wage formation in a unionized economy where consumers as an externality in their utility function have the level of local pollution. If modelled in a microeconomically consistent way this externality should also be present in the preferences of the trade union. The key result is that when this trade‐off between pollution and employment is included in the trade unions’ preferences then they are willing to lower wages to generate substitution towards higher employment and lower pollution. As a consequence, an increase in the pollution tax will lead to lower wages. At a more general level the results show that in models analyzing pollution issues, such as the double dividend literature, it is very important for the policy conclusions how trade unions are introduced.     

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.     

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.     

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.     

Preliminary Evidence on Wage Setting in Greek Manufacturing

Abstract. The negotiating power of the unions and their role in wage determination depends on the level of centralization of the wage bargaining system as well as on other institutional arrangements. In this study, we estimate a set of wage equations in order to study the employment effects of different unions’ stances in wage determination as well as to investigate other characteristics of employment in Greek manufacturing. We discriminate between workers and employees (blue‐ and white‐collar workers) and between sectors in order to capture differences in the relative supply as well as differences in the negotiating power among the staff of the same industry. Empirical findings reveal that the persistence of unemployment arises as a result of the great bargaining power of the unions in negotiations at a sectoral level. White‐collar workers exhibit a stronger negotiating power compared with blue‐collar workers because of differences in the institutional framework.     

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.     

Effects of Regional Labour Markets on Migration Flows,by Education Level

European economies display large variations in unemployment rates across regions as well as between education groups. Insufficient labour mobility is widely believed to contribute to higher regional disparities and overall unemployment, but few studies have compared mobility responses of different education groups to regional shocks. This paper employs administrative registers covering the entire Norwegian population to compute annual time series from 1994 to 2004 of migration flows and regional labour market conditions by education level for 90 travel‐to‐work areas. We find that regional disparities in unemployment rates are decreasing in education level, whereas the response of migration flows to regional unemployment shocks is increasing in education level. The results suggest that low regional mobility of low‐educated workers may contribute to higher regional disparities and higher overall unemployment among the low educated.     

Immigration Policy,Equilibrium Unemployment,and Underinvestment in Human Capital

We analyse the impact of different immigration policies on human capital investment in a search‐theoretic model. This class of models features unemployment and underinvestment in human capital. The underinvestment in human capital can be solved by combining immigration policy with appropriate education subsidies. Extending the model with respect to different skill groups allows to analyse the observed bimodal skilled immigration of the USA.     

Trade and Labour Markets: Vertical and Regional Differentiation in Italy

The labour market misfortunes of the less skilled and rapid growth of international trade in manufactured goods with less advanced countries are linked by the paradoxical observation that trade theorists are in the forefront of those denying the importance of trade in income distribution. This paper analyses this conclusion by stressing the importance of vertical differentiation of trade flows and regional differentiation of skills in order to identify labour market effects of trade integration. Vertical and regional differentiation in trade and labour markets are analysed for a country, Italy, where these two elements seem to play a crucial role. The results show a likely displacement effect on unskilled labour due to trade flows with less advanced countries. Given the characteristics of Italian trade and labour markets, a stronger trade‐induced displacement effect on demand for unskilled labour takes place in the North of the country. Thus the vertical differentiation in Italian intra‐industry trade is a warning against understating the effect of trade on labour markets if product heterogeneity is not adequately considered. The regional differentiation of skill intensity is another warning against understating the effect of trade on labour markets whenever cross‐sectoral effects and the change in relative specialization are not adequately considered.     

EQUILIBRIUM INCENTIVE CONTRACTS AND EFFICIENCY WAGES

We analyze the optimal (efficiency) wage contract when output is contractible but firms neither observe the workers' effort nor their match‐specific productivity. Firms offer wage contracts that optimally trade off effort and wage costs. As a result, employed workers enjoy rents, which in turn creates unemployment. Nonetheless, the incentive power of the equilibrium wage contract is constrained efficient in the absence of taxes and unemployment benefits. We also show that more high‐powered incentive contracts tend to be associated with higher equilibrium unemployment rates. (JEL: E24, J30, J41)     

(Un)equal Educational Opportunities and the Labor Market: A Theoretical Analysis

This paper intends to study the effects of public school quality offer on the labor market performance. With this objective in mind, we build a matching model for the labor market in two sectors: schooled and non‐schooled. The skilled segment of the economy is endogenous and composed of a continuum of workers who differ in the quality of the school attended. We show that there is a trade‐off between the quantity and the quality of education and that a reduction in schooling costs increases school enrollment rates. However, it adversely reduces the job creation dynamics in the skilled sector, due to the Composition Effect. We also verify that a first order improvement in school quality distribution may generate an increase in the schooling rate and a greater job vacancy creation in the skilled sector with no negative effects on the unskilled sector.     

Is Wage Leadership an Instrument to Coordinate Unions’ Wage Policy?The Case of Imperfect Product Markets

Given an oligopolistic product market, trade unions organized at firm level want to coordinate their bargaining activities. If for some exogenous reasons centralization is not possible, unions could try to coordinate wage setting by wage leadership. The outcome of such wage leadership is compared with that of an uncoordinated bargaining and is characterized by higher utilities for all unions. But wages and employment levels are not symmetrical either for unions or for firms. The leader firm employment decreases and the follower firm employment rises compared with uncoordinated bargaining. This may cause problems with the implementation of wage leadership.     

THE RISE OF THE EAST AND THE FAR EAST: GERMAN LABOR MARKETS AND TRADE INTEGRATION

We analyze the effects of the unprecedented rise in trade between Germany and “the East” (China and Eastern Europe) in the period 1988–2008 on German local labor markets. Using detailed administrative data, we exploit the cross‐regional variation in initial industry structures and use trade flows of other high‐income countries as instruments for regional import and export exposure. We find that the rise of the East in the world economy caused substantial job losses in German regions specialized in import‐competing industries, both in manufacturing and beyond. Regions specialized in export‐oriented industries, however, experienced even stronger employment gains and lower unemployment. In the aggregate, we estimate that this trade integration has caused some 442,000 additional jobs in the economy and contributed to retaining the manufacturing sector in Germany. This is almost exclusively driven by the rise of Eastern Europe, not by China. We also conduct an analysis at the individual worker level, and find that trade had a stabilizing overall effect on employment relationships.     

Employment Adjustment: an International Perspective

ABSTRACT: Structural change has been a necessary feature of the historical growth in real output and improved living standards and re-allocation of labour is essential if economic growth and new job creation are to result in a significant reduction in unemployment. Our societies have evolved to a point at which the State is expected to facilitate industrial activity and at which it is simply unacceptable that people should be left to struggle unaided against adversities resulting from the play of markets. Effective and equitable adjustment raises a whole range of issues for the employing enterprise, the State, and for trade unions. The policies and procedures followed are, and should be, complementary but the mix varies appreciably between countries. Here, the author deals first with what happens in the enterprise and then with the range of possible policies.