steinar holden, december 2009 wage setting and unemployment...
TRANSCRIPT
![Page 1: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/1.jpg)
1
Steinar Holden, December 2009
Wage setting and unemployment Why is there unemployment?
Frictions
• differences between
o workers’ characteristics and preferences, and
o job requirements
• takes time to find appropriate matches
But:
• differences in unemployment across countries and
over time are too large
• Different focus in most of the literature:
o why doesn’t the price clear the market?
o why doesn’t the wage fall?
• Leads to Equilibrium Unemployment Theory
o stock – wage and price curves
o flows – search models
![Page 2: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/2.jpg)
2
Why doesn’t the wage fall?
• minimum wages – too low or non-existent in most
countries/for most workers
• efficiency wages – firms profit from high wages
o if motivation is important for efficiency
o if the wage is important for motivation
• wage bargaining
o workers/unions push wages above competitive
wage
Un U
Real wage Wage curve
Equilibrium unemployment
Price curve (labour demand)
![Page 3: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/3.jpg)
3
Theoretical framework
Imperfectively competitive firms, facing a downward
sloping demand curve,
Production function firm i (employment N only input)
Yi = F(Ni), F’ > 0, F’’ < 0
Demand (Qi is the producer price, Q the aggregate
output price level, E is the elasticity of demand, Y
aggregate demand)
, 1E
ii
QY Y EQ
−⎛ ⎞
= >⎜ ⎟⎝ ⎠
Profits in firm i (Wi is nominal wage, τ is payroll tax
rate)
πi = QiF(Ni) – Wi(1+τ)Ni
![Page 4: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/4.jpg)
4
Right-to-manage assumption:
Firms set prices (and employment) to maximize profits,
for given wages
(1 )1
1 '(.)i iQ WE
Q E F Qτ+
=−
relative price = markup * marginal cost
product market comp. up => E up => markup down
Leads to profit maximising labour demand
1 2(1 ) , , , 0, 0i
iWN N Y E N N
Qτ⎛ ⎞+
= < >⎜ ⎟⎝ ⎠
and indirect profit function
1 2(1 ) , , , 0, 0i
iW Y E N N
Qτπ π
⎛ ⎞+= < >⎜ ⎟
⎝ ⎠
![Page 5: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/5.jpg)
5
From firms’ price setting, and aggregating over firms
(Qi = Q for all i)
(1 ) 1 '( )W E F NQ Eτ+ −
=
or
1 2(1 ) , , 0, 0WN N E N NQτ⎛ ⎞+
= < >⎜ ⎟⎝ ⎠
• One-to-one link: employment and real wage,
o no direct effect of aggregate demand, Y, for
given real wage.
• Intuition:
o Y up => N up => marg. cost up => Qi up
=> Q up => W/Q down
(employment only increases if W/Q falls)
• More elastic product demand, E up, (greater
product market competition) leads to higher
employment for given real wage.
![Page 6: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/6.jpg)
6
Union utility
1 2, , 0, 0ii i
Wu u N u uP
⎛ ⎞= > >⎜ ⎟⎝ ⎠
P is consumer prices
Wages set in firm-specific bargain,
Nash bargaining solution
0 0(1 )max , , ( , )
i
i iiW
W WY u N u U ZQ P
τπ π⎛ ⎞⎛ ⎞+ ⎛ ⎞⎛ ⎞− −⎜ ⎟⎜ ⎟ ⎜ ⎟⎜ ⎟
⎝ ⎠⎝ ⎠⎝ ⎠⎝ ⎠
• π0 , u0(U, Z) disagreement points, u01 < 0, u02> 0,
o U is unemployment and
o Z is indicator for wage pressure variables, like
unemployment benefits, “union strength”,
industrial conflict legislation, etc.
• π0 , u0: what motivates bargainers to reach
agreement, (costly delay or risk of breakdown)
o increased capital mobility weakens workers
bargaining power
![Page 7: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/7.jpg)
7
The solution can be written on the form
(1 ) (1 ), , ,iW PW U Z EQ Q
τ τ+ −−
+
⎛ ⎞+ +⎜ ⎟=⎜ ⎟⎝ ⎠
producer real wage
= W(wedge, U, wage pressure, prod. market comp)
+ - + -
(where the effect of aggregate output Y is subsumed
under U, invoking Okun’s law)
• Lower product market competition leads to
o Larger rents to capture
o Less elastic labour demand
![Page 8: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/8.jpg)
8
Empirical evidence for the wage curve:
• aggregate times series
• evidence based on micro data
The Wage Curve (Blanchflower and Oswald)
• Evidence for many industrialised countries suggest
an “empirical law”, that the elasticity of real wages
wrt unemployment is about -0.1
o If unemployment doubles, real wages fall by
10 percent
• Empirical support for dynamic fluctuations around
a long-run wage curve, rather than a Phillips curve
• Evidence suggest stronger effect of unemployment
in non-union setting
o unions able to resist wage reduction when
unemployment is high
![Page 9: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/9.jpg)
9
• Equilibrium unemployment Un given by wage and
price setting behaviour
• Increased wage pressure, Z up,
=>wage curve shifts up => W/Q up and Un up
• More elastic product demand, E up
=> price curve shifts up => W/Q up and Un down
Un U
W(1+τ)/Q real wage W(P(1+τ)/Q,U,Z,E)
wage curve
Equilibrium unemployment
[(E-1)/E] F’(1-U) price curve
![Page 10: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/10.jpg)
10
• No direct effect of aggregate demand Y on Un.
o Price level adapts to make aggregate demand
equal to aggregate supply, at eq. U.
• This implies that there is no effect of increased public
demand on Un if the price elasticity for public demand
is the same as for private
o Increase in public demand leads to higher Un if
lower price elasticity than for private demand
Un U
W(1+τ)/Q W(P(1+τ)/Q,U, Z,E)
Equilibrium unemployment
[(E-1)/E] F’(1-U)
![Page 11: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/11.jpg)
11
Theory: Wages and prices set in nominal terms, based
on expectations
• U < Un possible if wage and price growth above
expected levels
• Increasing wage and price growth for U < Un
o In reality wage growth may increase even if U
> Un, e.g. due to high profits
• Increase in aggregate demand leads to U > Un (just
like in traditional Keynesian models), and the
model tells what happens to wage and price growth
Un U
real wage wage curve
Increasing inflation
price curve
Decreasing inflation
![Page 12: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/12.jpg)
12
Effect of productivity growth
• Higher productivity shifts price curve up
• Higher expected productivity growth leads to higher
wage demands which shifts wage curve up
• Equilibrium unemployment increases if
expected productivity growth > productivity growth
Un U
W(1+τ)/Q real wage
wage curve
price curve
![Page 13: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/13.jpg)
13
Effect of immigration for domestic workers
• Wage curve down due to
o more competition for jobs
o less mismatch in labour market
• Price curve (labour demand) down due to
o Can use immigrants instead
• Effect on equilibrium unemployment ambiguous
• Dolado et al (2007): Reduction in Spanish
unemployment due to immigration lowering Un
Un U
W(1+τ)/Q real wage
wage curve
price curve (labour demand)
![Page 14: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/14.jpg)
14
Open economy: increased aggregate demand leads to
lower equilibrium unemployment & higher cost level
In open economy:
Y up => Q up => P/Q down
=> wage curve down => Un down
• Domestic prices increase relative to foreign
prices and equilibrium unemployment falls
• Aggregate demand & fiscal policy affect eq. U
Un U
W(1+τ)/Q real wage
wage curve
price curve
![Page 15: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/15.jpg)
15
The long run
The price curve becomes flatter, in the limit horizontal,
fixing the producer real wage, due to requirement of
o expected rate of return to capital
o balanced foreign trade
Un U
W(1+τ)/Q
Wages
Equilibrium unemployment
Prices
![Page 16: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/16.jpg)
16
• Individually, workers and unions may still gain from
increased bargaining power
• Collectively (nationally) higher wage pressure gives
only rise to higher unemployment, with no long run
impact on real wages
o negative external effects in wage setting
on consumer and input prices,
on unemployment
public budget, and
from envy/status
• Yields strong incentives to incomes policy and
coordinated wage restraint
![Page 17: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/17.jpg)
17
Wage setting at
• national or regional level conducive to wage
moderation,
• industry or occupation level lead to increased wage
pressure
• firm level – depends on product market competition
• wage dispersion reduced within wage setting area
A digression on efficiency:
When wages are set by bargaining or efficiency wage
considerations, one should not expect relative wages to
be socially efficient
Wages higher in firms/industries with high productivity
or large rents (weak competition or natural resources)
• leads to lower employment in these firms
• may exacerbate distortions due to weak competition
But local wage setting may improve work incentives
![Page 18: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/18.jpg)
18
• Late 1960s and 1970s: increased wage pressure leads
to higher equilibrium unemployment
• Wage setting gradually more moderate since early
1980s
• Why did high unemployment persist?
![Page 19: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/19.jpg)
19
Sources of persistence
• Equilibrium unemployment may increase when
unemployment is high
• Low output and lower profitability lead to lower
investment and lower capital stock
o Labour demand shifts
• Long term unemployment
o Loss of skills
o Loss of motivation
o Sorting
• Insider wage setting
o Wage setters neglect the unemployed
o More likely under decentralised wage setting
(national unions cannot neglect the
unemployed)
![Page 20: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/20.jpg)
20
European unemployment – the aggregate evidence
Large variation over time and across countries
Econometric evidence based on panel data
• Interaction of stable institutions and shocks/baseline
variables which shift over time
o Layard et al (1991) (increased wage pressure, the
replacement ratio, real import price, etc)
o Ball (NBER, 1996) (monetary policy, institutions
and hysteresis)
o Blanchard and Wolfers (EJ, 2000) (TFP growth,
the real interest rate, labour demand shifts, etc)
• Changing institutions
o Belot and van Ours (JJIE, 2001) (interaction
between institutions)
o Nickell, Nunziata and Ochel (EJ, 2005)
Studies agree that institutions are important, but vary on
additional variables and interactions
![Page 21: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/21.jpg)
21
Nickell, Nunziata and Ochel (EJ, 2005)
20 OECD countries, 1961 - 1995
• Higher unemployment in country-years with
o strict EPL (not significant)
o high benefit replacement ratio
o long benefit duration
o interaction of benefit duration with repl. ratio
o increased union density
o low coordination in wage setting
o low interaction of coordination and union density
o high total employment tax rate
o low interaction of coordination and empl. tax rate
o high owner occupied housing (not significant)
o labour demand shock
o TFP shock
o money supply shock (not significant)
o real interest rate (not significant)
![Page 22: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/22.jpg)
22
• Based on dynamic simulations, Nickell et al find that
changing institutions can explain 55% of the 6.8
percentage point increase in European unemployment
from 1960s to 1990-95.
o changing benefits can explain 39%,
o increased labour taxes 26%,
o shift in union variables 19%, and
o movements in EPL 16%
• Nickell et al argue that model with institutions and
shocks make no real contribution to understanding the
change in unemployment as compared to the model
with changing institutions.
• Bassinini and Duval (OECD, 2006): Find results
along lines of Nickell et al, data 1982-2003:
o changes in institutions explain almost two-thirds
of non-cyclical unemployment changes
o replacement rate, tax wedge, product market
regulation lead to higher eq. unemployment
o corporatism and ALMP lead to lower eq U.
![Page 23: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/23.jpg)
23
Critique of the institutional explanation
Baker, Glyn, Howell and Schmidt (2004),
Freeman (2007)
Evidence based on institutional variables fragile due to
• uncertain classification of institutional variables
• “economic Darwinism”, where measures are
constructed ex-post of researchers who were not
unaware of unemployment developments
• coefficient estimates unstable, often insignificant or
with “wrong” sign
• no apparent bilateral relationships (consistent with
evidence in OECD, 2004)
o bilateral relationships in one decade often
disappear or are reversed in the next
Sparrman (2009) – Nickell et al – explanation behaves
poorly post-sample
![Page 24: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/24.jpg)
24
Summing up – my reading of the evidence
Some institutions are undoubtly of importance
• High unemployment benefits reduce job finding
rate for unemployed
o may increase labour force participation,
o may lead to better jobs
o effective control of job search
• Strict EPL reduces job flows
o Unclear effect on aggregate U
o Effect on subgroups
o Bad combinations exist
Must be possible to lay off employees if
there is no profitable jobs
• Large tax wedge for low income workers a problem
• Some labour market measures work, others don’t
o suitable education, training & job-search good
• Wage moderation is important, but measures of
coordination/centralisation are difficult
![Page 25: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/25.jpg)
25
Equilibrium unemployment:
• depend on institutions and mismatch
• sets lower bound to actual unemployment rate
• but actual unemployment also affected by shocks,
and effects may persist
• monetary policy key equilibriating mechanism
o other equilibrating mechanisms are weak
![Page 26: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/26.jpg)
26
Recent macro-unemployment research
• Reduction in unemployment during the mid 2000s
led to less interest in OECD unemployment
• More reseach on calibrated search models
o Ljungqvist and Sargent, others
• Some research on endogenous institutions
![Page 27: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/27.jpg)
27
Algan and Cahuc AEJ-Macro, 1/2009
• Better to protect workers than jobs
o Inspired by Danish flexicurity idea: generous
unemployment benefits reduce “political
need” for strict EPL
• In countries with weak civic attitudes, workers will
cheat making it less costly to insure workers by
strict EPL, in spite of adverse efficiency effects
![Page 28: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/28.jpg)
28
Relationship seems robust
![Page 29: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/29.jpg)
29
Blanchard and Phillipon (2006):
• Institutions are endogenous, it is the quality of the
labor relations that is the true underlying force
o “labor/employer relations are generally
cooperative”
• Relationship holds when quality is instrumented by
o strike activity in the 1960s
o attitude towards early unions in 19th century
![Page 30: Steinar Holden, December 2009 Wage setting and unemployment …folk.uio.no/sholden/Conf/Finansdep/Wage-Unemployment.pdf · 2009-12-08 · 11 Theory: Wages and prices set in nominal](https://reader034.vdocument.in/reader034/viewer/2022042214/5eb92473ed5e36082a26e274/html5/thumbnails/30.jpg)
30
hostile in France, Italy, Spain, Portugal
neutral in Denmark, Norway, Sweden,
Finland, the UK, Ireland
supportive in Germany, Switzerland, the
Netherlands, Austria