Macroeconomic Effects of Public‐Sector Unions

Motivated by the highly unionized public sectors, the high public shares in total employment, and the public‐sector wage premia observed in Europe, this paper examines the importance of public‐sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly unionized public sector, namely Germany during the period 1970–2007. The union model is an improvement over a model with exogenous public employment. In addition, endogenously determined public wage and hours add to the distortionary effect of contractionary tax reforms by generating greater tax rate changes, thus producing higher welfare losses.     

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.     

Endogenous Contracts in Unionized Oligopoly

We study the endogenous determination of contracts in a unionized oligopoly and the welfare implications thereof. Alternative contracts specify the sequencing in the selection of R&D and wages. They can be classified as ‘fixed’ when the unions set wages before the firms make their R&D decisions or ‘floating’ when the sequencing of these choices is reversed. If the unions are highly employment‐oriented, we find that either all firm–union pairs choose floating‐wage contracts or both contract types may coexist depending on the degree of technological spillovers. However, when the unions have stronger preference over attaining a good wage deal, then it becomes very likely that fixed‐wage contracts will endogenously emerge because they can serve as an insurance device against oppor tunistic wage increases. Our welfare analysis suggests that welfare‐improving contracts may nevertheless not always arise in equilibrium.     

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.     

DOES EMPLOYMENT PROTECTION CREATE ITS OWN POLITICAL SUPPORT?

This paper investigates the ability of employment protection to generate its own political support. A version of the Mortensen–Pissarides model is used for this purpose. If wages are set through Nash bargaining, workers value employment protection because it strengthens their hand in wage negotiations. Workers in high productivity matches benefit most from higher wages as they expect to stay employed for longer. By reducing turnover employment protection shifts the distribution of match‐specific productivity toward lower values. Thus stringent protection in the past actually reduces support for employment protection today. Introducing involuntary separations reverses this conclusion. Now workers value employment protection because it delays involuntary dismissals. Workers in low productivity matches gain most since they face the highest risk of dismissal. The downward shift in the productivity distribution is now a shift towards supporters.     

Unemployment and Employment Protection in a Unionized Economy with Search Frictions

Abstract. In the theoretical literature, the effects of employment protection on unemployment are ambiguous. Higher employment protection reduces job creation as well as job destruction. However, in most models, wages are bargained individually between workers and firms. Using a conventional matching model in which a monopoly union sets wages, I show that employment protection can unambiguously increase unemployment. Interestingly, I find that tightening the restrictions on redundancies and dismissals may even increase the probability of dismissal.     

INSULATION IMPOSSIBLE: MONETARY POLICY AND REGIONAL DEBT SPILLOVERS IN A FEDERATION

This paper studies the effects of monetary policy in the presence of debt spillovers within a monetary union. When capital markets are integrated, the fiscal policy of any member country will generally influence equilibrium wages and interest rates across the whole union. We ask whether there exists a monetary policy which can offset these spillovers. Within a general class of monetary policy rules, there does not exist one that completely insulates agents in one region from fiscal policy in the other. These debt spillovers will affect welfare through two channels: intertemporal efficiency and redistribution.     

Economic Growth and Welfare in a Neoclassical Overlapping Generations Growth Model with Minimum Wages and Consumption Taxes

We examine the effects of minimum wages on both the long‐run per worker GDP and welfare in the textbook Diamond style overlapping generations economy. In addition, we assume the existence of unemployment benefits financed at a balanced budget with consumption taxes. Under suitable conditions, it is shown that a regulated‐wage economy with unemployment performs better than a competitive‐wage economy with full employment in the long run. Moreover, a welfare‐maximizing minimum wage exists. Our findings may have interesting policy implications.     

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.     

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.     

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.     

Aspects of Relative Wage Flexibility in Greece

Abstract. Flexibility in relative wages can be either competitive or non-competitive. In Greece, in the period 1966–1988, wage and employment regulation as well as developments in industrial relations did not favour competitive flexibility and provided an environment conducive to non-competitive flexibility. With the noticeable exception of the period 1967–74, during which competitive forces emerged and played a dominant role, in 1966–88 the manufacturing labour market operated under the influence of industry-specific factors. Non-competitive flexibility associated with industry-specific changes in productivity in the long run and industry-specific rates of strike activity in the short run, influenced manufacturing relative wages. Furthermore, in 1977–88, the asymmetric response of industry wages to changes in industry productivity hindered employment growth.     

Risk Aversion,Collective Bargaining,and Wages in Germany

We develop an open‐shop model of trade union membership in which workers differ in their risk attitudes, and derive conditions under which the bargained wage will fall and union membership will increase with a general rise in risk aversion. Using data from the German Socio‐Economic Panel we define broad bargaining units and show that wages decline as average risk aversion of union members in these units rises, controlling for individual effects of risk aversion. Given a negative relationship between wages and employment, this suggests that secular changes in risk attitudes, because of an aging workforce or greater female labour force participation, can help to explain variations in the employment performance of unionized economies.     

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.     

Labour Market Policies: Welfare,Incomes, Employment

The — in some ways innovative — objective of this paper is the study of the dynamics of the disequilibria provoked by the emergence of involuntary unemployment in the labour market, and the role of the economic policy authorities (through welfare, incomes and employment policies), with the aim of discovering if there is an explicit or implicit consistency between the role of these authorities, their actions and the pursuit of maximum employment (or elimination of the disequilibria). We seek to show, in other words, whether the actions of the government authorities conform to their accepted meaning (the aim of reducing the disequilibria) or whether, on the contrary, it may not be possible to put forward a different interpretation, if sociopolitical variables are introduced into the analysis, thus placing in the foreground different and alternative objecties such as “conflict control” and/or the reaching of a consensus between the different social partners. The paper therefore begins by analysing separately the historical-theoretical characteristics of the individual policies considered — welfare, incomes and employment — in their evolution (with particular reference to the last two decades), and then attempts an interpretative key in synthesis, by resorting to a specific model derived from the theories of disequilibria.     

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.     

Technology,Employment and Wages

This paper provides a critical review of the impact of technical change on the structure of relative wages and employment, and considers some alternative explanations for the immiseration of low skilled workers. In the absence of any clear and distinguishing policy blueprint, the paper also seeks to clarify the major issues raised by our discussion for employment 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.     

Trade Liberalization and Labor Market Dynamics

This paper estimates a structural dynamic equilibrium model of the Brazilian labor market in order to study trade‐induced transitional dynamics. The model features a multi‐sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector‐specific experience, and costly switching of sectors. The model's estimates yield median costs of mobility ranging from 1.4 to 2.7 times annual average wages, but a high dispersion of these costs across the population. In addition, sector‐specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model for counterfactual trade liberalization experiments, the main findings are: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly reduced due to the delayed adjustment; (3) trade‐induced welfare effects depend on initial sector of employment and on worker demographics such as age and education. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of capital.     

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.