© rainer maurer, pforzheim - 1 - prof. dr. rainer maure macroeconomics 5. causes of unemployment

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- 1 -Prof. Dr. Rainer Maure

MacroeconomicsMacroeconomics

5. Causes of Unemployment5. Causes of Unemployment

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5.1. Types of Unemployment5.1. Types of Unemployment 5.1.1. Frictional Unemployment5.1.1. Frictional Unemployment 5.1.2. Keynesian Unemployment5.1.2. Keynesian Unemployment 5.1.3. Classical Unemployment5.1.3. Classical Unemployment

5.1.3.1. Insider/Outsider-Unemployment5.1.3.1. Insider/Outsider-Unemployment 5.1.3.2. Efficiency-Wage-Unemployment5.1.3.2. Efficiency-Wage-Unemployment 5.1.3.3. Hysteresis-Unemployment5.1.3.3. Hysteresis-Unemployment 5.1.3.4. Minimum-Wage-Unemployment5.1.3.4. Minimum-Wage-Unemployment 5.1.3.5. Mismatch Unemployment5.1.3.5. Mismatch Unemployment

5.2. The Concept of Productivity-oriented Wage Policy5.2. The Concept of Productivity-oriented Wage Policy5.3. Labor Market Laws in Germany5.3. Labor Market Laws in Germany

5.4. Questions for Review5.4. Questions for Review

Literature:Literature:◆ Chapter 6 Mankiw, Gregory; Macroeconomics, Worth Publishers.Chapter 6 Mankiw, Gregory; Macroeconomics, Worth Publishers.

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West Germany Germany

Long-run Development of the German Unemployment Rate1)

Source: Statistisches Bundesamt; 1) Share of Unemployed in Civilian Labor Force

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Long-run Development of the German Unemployment Rate


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Types of Unemployment

Frictional Unemployment Keynesian Unemployment

Insider-Outsider Unemployment

Efficiency WageUnemployment Hysteresis

Unemployment

Minimum WageUnemployment

Mismatch-Unemployment

ClassicalUnemployment

5. Causes of Unemployment5. Causes of Unemployment5.1. Types of Unemployment5.1. Types of Unemployment

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5.1. Types of Unemployment5.1. Types of Unemployment

5.1.1. Frictional Unemployment5.1.1. Frictional Unemployment


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➤ Causes of Frictional UnemploymentCauses of Frictional Unemployment■Normal Normal Labor Market Labor Market FluctuationsFluctuations

◆There is always a There is always a part of firmspart of firms that that reducesreduces the the demand for labordemand for labor, , because of firm-specific or sector-specific fluctuations.because of firm-specific or sector-specific fluctuations.

◆Similarly, Similarly, anotheranother part of all firms part of all firms always always increases increases thethe demand for demand for laborlabor, because of firm-specific or sector-specific fluctuations., because of firm-specific or sector-specific fluctuations.

■The laid-off unemployed need The laid-off unemployed need time to searchtime to search for new jobs: for new jobs:◆They have to They have to collect informationcollect information about firms that demand employees about firms that demand employees

with their qualification.with their qualification.◆They have to They have to transfer informationtransfer information about their qualification to firms. about their qualification to firms.◆Firms have to Firms have to processprocess this this informationinformation and respond to applicants. and respond to applicants.

■Therefore, laid-offs are typically not immediately reemployed but Therefore, laid-offs are typically not immediately reemployed but join the “pool of unemployed”join the “pool of unemployed” for whilefor while. This kind of unemployment . This kind of unemployment is called “is called “frictional unemploymentfrictional unemployment” or “” or “job search unemploymentjob search unemployment” or ” or ““natural unemploymentnatural unemployment”.”.

5. Causes of Unemployment5. Causes of Unemployment5.1.1. Frictional Unemployment5.1.1. Frictional Unemployment

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➤ Frictional UnemploymentFrictional Unemployment::

➤ Since unemployed need Since unemployed need time for job searchtime for job search, they , they staystay some some time time in the pool of unemployedin the pool of unemployed, until they find new jobs. This , until they find new jobs. This causes “frictional unemployment”, even if the number of causes “frictional unemployment”, even if the number of dismissals equals the number of new employments.dismissals equals the number of new employments.

Employees

Dismissals

New Employment

Pause in the Pool of Unemployed

5. Causes of Unemployment5. Causes of Unemployment5.1.1. Frictional Unemployment5.1.1. Frictional Unemployment

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Dismissals New Employment

Share of Yearly Dismissals and New Employment in Total Employment(1970-1991 West Germany, since 1992 Germany)

Source: SVR (2004/5)

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Can the development of German unemployment

be explained by frictional unemployment?

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5.1.1. Frictional Unemployment 5.1.1. Frictional Unemployment

5.1.2. Keynesian Unemployment5.1.2. Keynesian Unemployment


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➤ As chapter 3 has shown:As chapter 3 has shown:

■Keynesian UnemploymentKeynesian Unemployment

◆……is caused by normal business cycle fluctuations.is caused by normal business cycle fluctuations.

◆……increases in recessions.increases in recessions.

◆……decreases in economic upswings.decreases in economic upswings.

5. Causes of Unemployment5. Causes of Unemployment5.1.2. Keynesian Unemployment5.1.2. Keynesian Unemployment

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P1

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The Effect of Recessions on the The Effect of Recessions on the Labor MarketLabor Market

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If firms adjust in the short run their production of goods to the demand for goods, they will also adjust their labor demand to the demand for goods in the short run.

Consequently, in the short run, the labor demand of firms is, under Keynesian assumptions, not determined by the real wage w/P and the given capital stock K1, i.e. by LD(w/P,K1), but by the demand for goods YD.

The "short-run" demand for labor therefore equals LD(YD)LD (w/p,K1)

"Normal Capacity GDP" or "Full Employment GDP"

Labor Demand of the Neoclassical Model

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The Effect of Recessions on the The Effect of Recessions on the Labor MarketLabor Market

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If the "short-run" demand for labor equals LD(YD) and if the real wage is downward fixed by a collective bargaining contract to the long-run market equilibrium level of w1/P1, a reduction of the demand for goods from the normal capacity GDP to a level of YD,2 will cause unemployment.This unemployment emerges despite the fact that the real wage equals the long run equilibrium value of w1/P1!It is therefore no neoclassical unemployment but "Keynesian unemployment".

YD,2

Decrease of Short-run

Labor Demand in a Recession LS(w/p)Keynesian

Unemployment

Decrease of GDP below its normal capacity level in a

Recession

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The Effect of Booms on the The Effect of Booms on the Labor MarketLabor Market

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If the "short-run" demand for labor equals LD(YD) and if the real wage is downward fixed by a collective bargaining contract to the long-run market equilibrium level of w1/P1, an increase in the demand for goods from the normal capacity GDP to a level of YD,2 will cause overemployment.In order to get additional workers, firms must increase real wages in the short-run from w1/P1 to w2/P1.

YD,2

Increase in Short-run Labor Demand in an

Upswing

LS(w/p)

Keynesian Overemployment

Increase in GDP above its normal capacity level in an

Upswing

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Does Keynesian unemployment explain

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Does Keynesian unemployment explain

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5.1.3. Classical Unemployment5.1.3. Classical Unemployment


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➤ Classical unemploymentClassical unemployment

■……appears in appears in different variantsdifferent variants..

■What all these variants have in common is a What all these variants have in common is a disturbeddisturbed market mechanism market mechanism that cannot equilibrate that cannot equilibrate demand and supply.demand and supply.

■There is typically some There is typically some institutionally caused form of institutionally caused form of wage rigiditywage rigidity, which disturbs the market mechanism., which disturbs the market mechanism.

■If this wage rigidity If this wage rigidity causes wages to be “too high”causes wages to be “too high”, , unemployment will be the result.unemployment will be the result.

5. Causes of Unemployment5. Causes of Unemployment 5.1.3. Classical Unemployment5.1.3. Classical Unemployment

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5.1.3.1. Insider/Outsider-Unemployment5.1.3.1. Insider/Outsider-Unemployment


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5. Causes of Unemployment5. Causes of Unemployment5.1.3.1. Insider/Outsider-Unemployment5.1.3.1. Insider/Outsider-Unemployment

➤ Insider/Outsider-UnemploymentInsider/Outsider-Unemployment■Following the insider-outsider theory of unemployment, there Following the insider-outsider theory of unemployment, there

exists an exists an economic incentiveeconomic incentive in in collective wage bargainingcollective wage bargaining systems for labor unions to negotiate systems for labor unions to negotiate wageswages that are that are above the above the full employment equilibrium wage ratefull employment equilibrium wage rate and tolerate the resulting and tolerate the resulting unemployment: unemployment: ◆Following this theory, labor union officials care Following this theory, labor union officials care onlyonly about the about the

welfarewelfare ofof the the employedemployed, since they are members of the labor , since they are members of the labor union (“union (“insidersinsiders”) and pay in last instance the salaries of the ”) and pay in last instance the salaries of the officials.officials.

◆The The unemployedunemployed (“ (“outsidersoutsiders”) are ”) are not payingnot paying trade union members trade union members and have no influence on the income of the trade union officials. and have no influence on the income of the trade union officials. Therefore their welfare is neglected by labor union officials.Therefore their welfare is neglected by labor union officials.

■The following graphs illustrate the basic argument of the The following graphs illustrate the basic argument of the insider/outsider theory of unemployment.insider/outsider theory of unemployment.

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If the trade union negotiates a real wage that equals the

market equilibrium level w*/P*, their members L* will

have the same wage as without a trade union. So,

why should they be willing to pay their membership-fees?

w*/P*

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w1/P*Labor unions do therefore

negotiate a real wage level above the equilibrium wage level w*/P*

L*

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Gain of wage payments of still employed workers (=Insider)

Loss of wage payments of dismissed workers (=Outsider)

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Resulting Unemployment

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5.1.3.2. Efficiency-Wage-Unemployment5.1.3.2. Efficiency-Wage-Unemployment


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➤ Following the efficiency-wage theory, unemployment can also be Following the efficiency-wage theory, unemployment can also be caused by caused by firms paying voluntarily wagesfirms paying voluntarily wages that are that are higher than higher than the market equilibriumthe market equilibrium wage rate. wage rate.

➤ Historic Example:Historic Example:


5. Causes of Unemployment5. Causes of Unemployment5.1.3.2. Efficiency-Wage-Unemployment5.1.3.2. Efficiency-Wage-Unemployment

„In 1913 the Ford Motor Company started paying its worker 5 $ per day. The prevailing wage at the time was between 2 $ und 3 $ per day, so Ford’s wage was well above the equilibrium level. Not surprisingly, long lines of job seekers waited outside the Ford plant gates hoping for a chance to earn this high wage“ (Source: Mankiw, Macroeconomics , p. 167)(Source: Mankiw, Macroeconomics , p. 167)

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Business Report of the Ford Motor Company from 1913:

„The Ford high wage does away with all the inertia and resistance. (…) The workingmen are absolutely docile, and it is safe to say that since the last day of 1913, every single day has seen major reductions in Ford shops’ labor costs.” Absenteeism fell by 75 %, suggesting a large increase in worker effort. Ford and his associates freely declared on many occasions that the high wage policy had turned out to be good business.

(Source: Mankiw, Macroeconomics , p. 167)(Source: Mankiw, Macroeconomics , p. 167)

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➤ Current Example for Efficiency-Wages:Current Example for Efficiency-Wages:

„The automotive supplier Leoni currently employs more than 23000 workers worldwide. Thereby, Leoni primarily selects production locations with a low wage level. However, at such locations Leoni pays relatively generous wages. For example, in a plant of Leoni in Stryi, Ukraine, Leoni pays significantly more than the local minimum wage, which equals 650 Griwna (100 Euro). Furthermore, Leoni voluntarily offers lunches at reduced costs as well as free health insurance. Such benefits are not common standard in the Ukraine.”

Source: Die Zeit, 28.04.05, “The Automotive Supplier Leoni on a Worldwide Search for Source: Die Zeit, 28.04.05, “The Automotive Supplier Leoni on a Worldwide Search for Low-cost Locations”Low-cost Locations”

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➤ Causes for higher efficiency by higher wages:Causes for higher efficiency by higher wages:

■In many developing countries, In many developing countries, better paid employeesbetter paid employees are in are in better healthbetter health and therefore more productive. and therefore more productive.

■Higher wages Higher wages reduce the fluctuationreduce the fluctuation of the employees of a of the employees of a firm, since there are less better paid job opportunities outside firm, since there are less better paid job opportunities outside the firm. A lower level of fluctuation causes the firm. A lower level of fluctuation causes lower costs of on-lower costs of on-the-job trainingthe-job training for new employees. for new employees.

■Higher than average wages paid by a firm give rise to Higher than average wages paid by a firm give rise to more more job applicantsjob applicants and hence a larger opportunity to select and hence a larger opportunity to select employees with a employees with a higher qualificationhigher qualification..

■Higher than average wages cause a Higher than average wages cause a higher losshigher loss for an for an employee employee in case of a dismissalin case of a dismissal. Every employee has . Every employee has therefore a strong therefore a strong incentiveincentive to give to give no reason for a dismissalno reason for a dismissal (long duration of employee’s illness, default, theft etc.)(long duration of employee’s illness, default, theft etc.)


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Unemployment results, if households’ labor supply

depends positively on wages.

Efficiency wagepremium causes an

increase of the average wage above the equilibrium wage.


No dismissals, since firms, which pay an efficiency premium, do not reduce their demand for labor

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5.1. Types of Unemployment5.1. Types of Unemployment5.1.1. Frictional Unemployment 5.1.1. Frictional Unemployment 5.1.2. Keynesian Unemployment5.1.2. Keynesian Unemployment

5.1.3. Classical Unemployment5.1.3. Classical Unemployment 5.1.3.1. Insider/Outsider-Unemployment5.1.3.1. Insider/Outsider-Unemployment

5.1.3.2. Efficiency-Wage-Unemployment5.1.3.2. Efficiency-Wage-Unemployment 5.1.3.3. Hysteresis-Unemployment5.1.3.3. Hysteresis-Unemployment


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➤ Hysteresis Unemployment:Hysteresis Unemployment:■ Conditions: Conditions:

1.1. QualificationQualification of an employee of an employee decreasesdecreases withwith the duration of the duration of unemploymentunemployment (lack of “training on the job”…). (lack of “training on the job”…).

2.2. Collective labor Collective labor agreementsagreements prohibit lower wagesprohibit lower wages for new for new employees.employees.

3.3. Keynesian unemploymentKeynesian unemployment appears in recessions. appears in recessions.

■ Consequences:Consequences:◆ A A Keynesian recessionKeynesian recession causes unemployment. causes unemployment.◆ The The unemployed lose qualificationunemployed lose qualification. After the recession their . After the recession their

qualification is lower than before the recession.qualification is lower than before the recession.◆ For firms, lower qualification means For firms, lower qualification means lower productivitylower productivity..◆ Firms engage workers with lower productivity Firms engage workers with lower productivity only, ifonly, if their their

wageswages are are lowerlower than wages of workers with high productivity. than wages of workers with high productivity.◆ If collective labor agreements prohibit lower wages for new If collective labor agreements prohibit lower wages for new

employees, employees, firms engage less workersfirms engage less workers after a recessionafter a recession than than dismissed beforedismissed before the recession. the recession.

=>=> A part of the A part of the unemployed stays unemployedunemployed stays unemployed even after the even after the recession is over.recession is over.

5. Causes of Unemployment5. Causes of Unemployment 5.1.3.3. Hysteresis-Unemployment5.1.3.3. Hysteresis-Unemployment

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Can hysteresis unemployment explain

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5.1.3.3. Hysteresis-Unemployment 5.1.3.3. Hysteresis-Unemployment

5.1.3.4. Minimum-Wage-Unemployment5.1.3.4. Minimum-Wage-Unemployment


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➤ Minimum Wage Unemployment:Minimum Wage Unemployment:

■In many countries minimum wages are In many countries minimum wages are legally requiredlegally required::

5. Causes of Unemployment5. Causes of Unemployment 5.1.3.4. Minimum-Wage-Unemployment5.1.3.4. Minimum-Wage-Unemployment

2011 Hourly WagesShare in Average

Wages

Share in Total

Employees

United Kingdom 6,91 € 45% 1,9%USA 4,47 € 33% 1,1%Ireland 7,65 € 50% 3,3%France 9,00 € 15,1%Spain 3,86 € 38% 1,0%Portugal 2,95 € 41% 4,2%Czech Republic 1,82 € 39% 2,3%Poland 1,85 € 35% 2,3%Slovakia 1,82 € 43% 1,9%

Source: Eurostat

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Labor Market Segment for High Skilled Worker

Labor Market Segment for Low Skilled Worker

w/P w/P

Minimum WageMinimum Wage

The equilibrium wage rate for high skilled workers is typically higher than the equilibrium wage rate for low skilled workers.

To pay more than required is allowed!

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Labor Market Segment for Low Skilled Worker

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Minimum WageMinimum Wage

Unemployment

Therefore, a minimum wage typically causes unemployment for in the market segment for low skilled workers: The larger the market segment of low skilled workers and the

higher the minimum wage the larger the share of the total labor force, which is affected by a minimum wage.

To pay more than required is allowed!

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➤ Minimum Wages in Germany:

■In Germany labor unions and employer associations can set minimum wages for their sectors. They are, however, only binding for firms that are members of employer associations, what is the case for 57% of West German employees and of 41% of East German employees.

■The federal minister for labor is, however, entitled by law to declare such collective wage agreements for generally binding in sectors where more than 50% of all employees are labor union members and the employers associations of these sectors agree.

5. Causes of Unemployment 5.1.3.4. Minimum-Wage-Unemployment

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■Furthermore, following the “Arbeitnehmerentsendegesetz” for special sectors the federal minister for labor is entitled to declare minimum wage for binding.

■For the year 2008 these were:◆Demolition Industry: 9,10 € to 11,96 €

◆Main Construction Trade: 8,50 € to 12,50 € ;,

◆Roofer Trade: 10,20 € ,

◆Paintshop Trade: 7,50 € to 11,05 € ,

◆Commercial Cleaning: 6,58 € to 10,80 €

◆Electrician Trade: 7,90 € (East), 9,40 € (West)

◆Post Services: 8,00 € to 9,80 €


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■Labor unions like DGB, IG-Metall and NGG demand a general minimum wage of 8,5 €

■The Ifo-Institute (Munich) expects a loss of about 1,1 million jobs at a minimum wage of 7,5 €.

■The Council of Economic Advisers of Germany guesses that only a minimum wage not higher than 5 € will have no negative unemployment effects.

■A minimum wage of 7,5 € would increase the wages of about 10% of all employees in Germany.


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➤ Minimum Wages in Germany:➤ Distribution of wage levels in the year 2012:


=> A minimum wage of EUR 8,50 would increase of the wages of about 6 million employees (17% of all employees) in Germany.

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5.1.3.3. Hysteresis-Unemployment 5.1.3.3. Hysteresis-Unemployment


5.1.3.6. Mismatch-Unemployment5.1.3.6. Mismatch-Unemployment


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➤ Mismatch-Unemployment:Mismatch-Unemployment:

■As chapter 1 has shown, the industrial structure of an As chapter 1 has shown, the industrial structure of an economy changes steadily.economy changes steadily.

■The typical pattern is:The typical pattern is:◆ The The industry sectorindustry sector loses share in GDP, while loses share in GDP, while

◆ the the service sectorservice sector gains share in GDP. gains share in GDP.

■How does this affect the labor market?How does this affect the labor market?

5. Causes of Unemployment5. Causes of Unemployment 5.1.3.5. Mismatch Unemployment5.1.3.5. Mismatch Unemployment

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1975 1980 1985 1990 1995 2000

Other Private Service Industries1)

Industry

Wholesale and Retail Trade &

Banking, Insurance, Real Estate &Business Services

Government Services

Structure of German GDP by Production (in Percent of Total GDP; Current Prices)

Agriculture and Forestry

Hotel and Catering Industries

48 %

71 %

48 %

28 %

Source: SVG, Jg. 2004/5

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1975 1980 1985 1990 1995 2000

.

Structure of German Employees

Wholesale and Retail Trade &Business Services

Government ServicesShare of Employees per Sector in % of all Employees

Real Estate,Banking,Insurance

Other Private Service Industries1)

Hotel and Catering Industries

Industry

Agriculture and Forestry

Source: SVG, Jg. 2004/5

46 %

71 %

45 %

27 %

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➤ The The sectoral changesectoral change of an economy of an economy changeschanges the the structurestructure of the of the demand for labordemand for labor::

■The The industrial sectorindustrial sector sheds labor. sheds labor.

■The The service sectorservice sector engages labor. engages labor.


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Increase in the Demand for Labor



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Unemployment, if wages are downward ridgid Increase in wages



Unemployment

L2 L2

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Fixed Wage

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5.1.3. Classical Unemployment5.1.3. Classical Unemployment 5.1.3.1. Insider/Outsider-Unemployment5.1.3.1. Insider/Outsider-Unemployment 5.1.3.2. Efficiency-Wage-Unemployment5.1.3.2. Efficiency-Wage-Unemployment

5.1.3.3. Hysteresis-Unemployment5.1.3.3. Hysteresis-Unemployment



5.2. The Concept of Productivity-oriented Wage Policy5.2. The Concept of Productivity-oriented Wage Policy


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➤ Up to this point we have simplified the analysis:Up to this point we have simplified the analysis:

■The The labor demand curvelabor demand curve was was constantconstant over time. over time.

➤ As growth theory (Chapter 4) has revealed, the capital stock As growth theory (Chapter 4) has revealed, the capital stock of an economy steadily grows.of an economy steadily grows.

■If If capital and laborcapital and labor are sufficiently are sufficiently complementarycomplementary (Chapter 2), this will lead to a steadily growth of labor (Chapter 2), this will lead to a steadily growth of labor productivity.productivity.

■In other words: The more (and better…) machines are In other words: The more (and better…) machines are available, the higher is the productivity of a worker.available, the higher is the productivity of a worker.

■Profit-maximizingProfit-maximizing firmsfirms are therefore willing to are therefore willing to paypay higher higher wageswages..

■Therefore, the Therefore, the labor demandlabor demand curve will curve will shift upwardshift upward, when , when the capital stock grows.the capital stock grows.

5. Causes of Unemployment5. Causes of Unemployment 5.2. Productivity-oriented Wage Policy5.2. Productivity-oriented Wage Policy

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LD(w/P,Kt)

Growth of the capital stock Kt > Kt-1 shifts the labor demand curve of firms upward.

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LD(w/P,Kt)

LS(w/P)

wt-1/Pt-1

Lt-1

This causes an increase of the equilibrium wage rate from wt-1/Pt-1 to wt/Pt and an increase of labor input from Lt-1 to Lt.

wt/Pt

Lt

Free market equilibrium:

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➤ This analysis shows:This analysis shows:

■A A growing capital stockgrowing capital stock (= positive net investment) (= positive net investment) allowsallows for for growing wagesgrowing wages without necessarily causing unemployment. without necessarily causing unemployment.

■Only wages must Only wages must not grow stronger thannot grow stronger than the intersection the intersection point of labor supply and labor demand.point of labor supply and labor demand.

➤ On a free and On a free and unregulated labor marketunregulated labor market, the wage level tends , the wage level tends towards this level in the medium-term.towards this level in the medium-term.

➤ On a regulated labor market with On a regulated labor market with collective wage bargainingcollective wage bargaining, the , the question arises every year by question arises every year by how much wages can be how much wages can be increasedincreased without causing a loss of jobs. without causing a loss of jobs.


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➤ To cope with these kind of questions the To cope with these kind of questions the German Council of German Council of Economic AdvisersEconomic Advisers (Sachverständigenrat zur Begutachtung der (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung = “the five wise (wo)men”) gesamtwirtschaftlichen Entwicklung = “the five wise (wo)men”) has developed the concept of productivity-oriented wage policy:has developed the concept of productivity-oriented wage policy:■Basic ideaBasic idea: The collectively agreed : The collectively agreed growth of wagesgrowth of wages must must notnot be be

higherhigher than the than the growth rate of labor productivitygrowth rate of labor productivity..

■ArgumentArgument: If wages growth stronger than labor productivity, this will : If wages growth stronger than labor productivity, this will cause cause dismissal of workersdismissal of workers by firms. by firms.

➤ However, this concept has its However, this concept has its perilsperils::■ If wages grow just as strong as productivity, this will If wages grow just as strong as productivity, this will notnot cause cause

dismissalsdismissals,,

■but may but may neverthelessnevertheless cause cause unemploymentunemployment, as the following , as the following analysis shows:analysis shows:


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LD(w/P,Kt)

LS(w/P)

TLt-1

Lt

Collective Wage Bargaining:

If the agreed wage rateTLt grows as strong as labor productivity, this will not cause dismissals but will also not give rise to new employment.

TLt

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Lt

The result is unemploy-ment, since households supply more labor, because of the higher wage.

TLt

Unemployment


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LS(w/P)

TLt-1

Lt


For already employed people this is an

advantage, since wage growth is higher as under free market

conditions: TLt > wt/Pt

TLt

Unemployment

wt/Pt

Lt

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5.1.3. Classical Unemployment5.1.3. Classical Unemployment 5.1.3.1. Insider/Outsider-Unemployment5.1.3.1. Insider/Outsider-Unemployment 5.1.3.2. Efficiency-Wage-Unemployment5.1.3.2. Efficiency-Wage-Unemployment

5.1.3.3. Hysteresis-Unemployment5.1.3.3. Hysteresis-Unemployment



5.2. The Concept of Productivity-oriented Wage Policy5.2. The Concept of Productivity-oriented Wage Policy

5.3. Labor Market Laws in Germany5.3. Labor Market Laws in Germany


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5. Causes of Unemployment 5. Causes of Unemployment 5.3. Labor Market Laws in Germany5.3. Labor Market Laws in Germany

➤ The various causes for “classical unemployment” show The various causes for “classical unemployment” show that wages that wages downwardly fixed by collective labor market downwardly fixed by collective labor market agreementsagreements can can cause unemploymentcause unemployment..

➤ In Germany, collective labor market agreements are In Germany, collective labor market agreements are legally allowed for by the legally allowed for by the ■ Works Council Constitution ActWorks Council Constitution Act (Betriebsverfassungsrecht) (Betriebsverfassungsrecht)

and the and the

■ Collective Labor Agreement ActCollective Labor Agreement Act (Tarifvertragsrecht). (Tarifvertragsrecht).

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➤ The The legal foundationslegal foundations of collective wage agreements: of collective wage agreements:

■ § 77(3), Works Council Constitution Act§ 77(3), Works Council Constitution Act : : ◆ Single plant bargaining agreementsSingle plant bargaining agreements between the workers between the workers

council and the employee council and the employee must notmust not affectaffect regulations of the regulations of the collective wage agreementcollective wage agreement between the labor union and the between the labor union and the employers association.employers association.

◆ ExceptionException: The collective agreement explicitly contains opening : The collective agreement explicitly contains opening clauses.clauses.

■ § 4(3), Collective Labor Agreement Act§ 4(3), Collective Labor Agreement Act::◆ Deviations Deviations from the collective wage agreement are from the collective wage agreement are onlyonly

possible, possible, ifif these deviations lead to these deviations lead to higher wages and / or less higher wages and / or less working timeworking time. Deviations. Deviations from the collective wage agreement from the collective wage agreement concerning a concerning a higher security of employmenthigher security of employment are are not allowed fornot allowed for..

■ § 3, Collective Labor Agreement Act§ 3, Collective Labor Agreement Act::◆ If a firm leaves the employers association, the current collective If a firm leaves the employers association, the current collective

wage agreement between this association and the labor union wage agreement between this association and the labor union is still is still bindingbinding for this firm for this firm untiluntil a new agreement is negotiateda new agreement is negotiated..


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➤ Resulting Problems:Resulting Problems:■ Under these legal conditions the Under these legal conditions the insider/outsider probleminsider/outsider problem

sets always a strong sets always a strong incentiveincentive for trade unions to for trade unions to increase increase wages strongerwages stronger than productivity growth and accept the than productivity growth and accept the resulting unemployment.resulting unemployment.

■ The following case study illustrates the dubious results of The following case study illustrates the dubious results of this legal framework.this legal framework.

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Case Study: Viessmann/IG-Metall (1):Case Study: Viessmann/IG-Metall (1):The heating-manufacturer Viessmann had the intention to produce its The heating-manufacturer Viessmann had the intention to produce its newnew gas gas heating moduleheating module “Pendola” in Myto, Czech Republic, because of lower “Pendola” in Myto, Czech Republic, because of lower labor costs. However, the German labor costs. However, the German workers councilworkers council of the Viessmann plant in of the Viessmann plant in Allendorf convinced the management to install the new production facilities Allendorf convinced the management to install the new production facilities in Allendorf, and in Allendorf, and guarantee to forgo dismissalsguarantee to forgo dismissals for a span of time of for a span of time of 3 years3 years, , and engage 60 new workers there in exchange for a and engage 60 new workers there in exchange for a three-years increase inthree-years increase in weekly weekly working hours from 35 to 38working hours from 35 to 38 without wage compensation. 96,4 % of without wage compensation. 96,4 % of the Viessmann employees ratified this contract. the Viessmann employees ratified this contract.

However, this modification of the collective wage agreement was not accepted However, this modification of the collective wage agreement was not accepted by the labor union (IG-Metall).by the labor union (IG-Metall). The union brought the case to court and The union brought the case to court and demanded an exclusion of the non-union members in the workers council of demanded an exclusion of the non-union members in the workers council of Viessmann (which held the majority in this council).Viessmann (which held the majority in this council).


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Case Study:Case Study: Viessmann/IG-Metall (2):Viessmann/IG-Metall (2):The court decided that The court decided that the modifications of the collective agreement were not the modifications of the collective agreement were not admissible for workers that were labor union members by § 4(3) of the admissible for workers that were labor union members by § 4(3) of the Collective Labor Agreement ActCollective Labor Agreement Act. Following the court, the workers council . Following the court, the workers council was not entitled to negotiate with the Viessmann management.was not entitled to negotiate with the Viessmann management.

The court decision caused strong protest by the Viessmann workers so that The court decision caused strong protest by the Viessmann workers so that finally the IG-Metall gave in and accepted a modification of the collective finally the IG-Metall gave in and accepted a modification of the collective labor agreement. labor agreement.

The new gas heating module “Pendola” was successfully produced in The new gas heating module “Pendola” was successfully produced in Allendorf so that Allendorf so that instead of only 60 new employees 600 new employees were instead of only 60 new employees 600 new employees were finally engaged therefinally engaged there..

(Quelle: nach Sinn (2004; S. 132-3)(Quelle: nach Sinn (2004; S. 132-3)


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➤ You should be able to answer the following questions You should be able to answer the following questions at the end of this chapter. All of the questions can be at the end of this chapter. All of the questions can be answered with the help of the lecture notes. If you have answered with the help of the lecture notes. If you have difficulties in answering a question, discuss this difficulties in answering a question, discuss this question with me at the end of the lecture, attend my question with me at the end of the lecture, attend my colloquium or send me an E-Mail.colloquium or send me an E-Mail.

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1.1. What causes frictional unemployment? How can frictional What causes frictional unemployment? How can frictional unemployment be reduced? Is frictional unemployment a good unemployment be reduced? Is frictional unemployment a good explanation for the development of unemployment in Germany?explanation for the development of unemployment in Germany?

2.2. What causes Keynesian unemployment? How can Keynesian What causes Keynesian unemployment? How can Keynesian unemployment be reduced? Is Keynesian unemployment a good unemployment be reduced? Is Keynesian unemployment a good explanation for the development of unemployment in Germany?explanation for the development of unemployment in Germany?

3.3. What is “classical unemployment”? What kinds of classical What is “classical unemployment”? What kinds of classical unemployment are to be distinguished?unemployment are to be distinguished?

4.4. What causes insider/outsider-unemployment? How can What causes insider/outsider-unemployment? How can insider/outsider-unemployment be reduced? Is insider/outsider-insider/outsider-unemployment be reduced? Is insider/outsider-unemployment a good explanation for the development of unemployment a good explanation for the development of unemployment in Germany?unemployment in Germany?

5.5. What causes mismatch-unemployment? How can mismatch-What causes mismatch-unemployment? How can mismatch-unemployment be reduced? Is mismatch-unemployment a good unemployment be reduced? Is mismatch-unemployment a good explanation for the development of unemployment in Germany?explanation for the development of unemployment in Germany?

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6.6. What causes efficiency-wage-unemployment? How can efficiency-What causes efficiency-wage-unemployment? How can efficiency-wage-unemployment be reduced? Is efficiency-wage-unemployment wage-unemployment be reduced? Is efficiency-wage-unemployment a good explanation for the development of unemployment in a good explanation for the development of unemployment in Germany?Germany?

7.7. What causes hysteresis-unemployment? How can hysteresis-What causes hysteresis-unemployment? How can hysteresis-unemployment be reduced? Is hysteresis-unemployment a good unemployment be reduced? Is hysteresis-unemployment a good explanation for the development of unemployment in Germany?explanation for the development of unemployment in Germany?

8.8. What causes minimum-wage-unemployment? How can minimum-What causes minimum-wage-unemployment? How can minimum-wage-unemployment be reduced? Is minimum-wage-unemployment wage-unemployment be reduced? Is minimum-wage-unemployment a good explanation for the development of unemployment in a good explanation for the development of unemployment in Germany?Germany?

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9.9. Assume that w/P equals the monthly wage rate in the following Assume that w/P equals the monthly wage rate in the following diagram. Determine the equilibrium monthly wage rate. What will diagram. Determine the equilibrium monthly wage rate. What will happen, if the government pays a social welfare benefit per month happen, if the government pays a social welfare benefit per month equivalent to 11 little quads? What happens if the welfare benefit is equivalent to 11 little quads? What happens if the welfare benefit is equal to 6 little quads only?equal to 6 little quads only?


© rainer maurer, pforzheim - 1 - prof. dr. rainer maure macroeconomics 5. causes of unemployment

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