Imperfect Labor Research Articles

Microfinance and Missing Markets

The existing theoretical analysis of microfinance focuses on the nature of the loan contracts that mitigates the pervasive problems of moral hazard and adverse selection in the absence of physical collateral. We depart from the existing literature and draw attention to the role of missing or imperfect labor market in understanding some of the important 'second generation' puzzles and debates in the microfinance movement. Our analysis shows that a focus on the labor market helps explain a number puzzling aspects of microfinance in developing countries like (i) credit-worthiness of poor women borrowers facing very high interest rates, (ii) the microentrepreneurs unwillingness or inability to scale up their economic activity, (iii) conflicting views about interest rate elasticity of demand for microcredit (i.e., a zero elasticity according to practitioners, but a significant negative elasticity according to econometric estimate). The analysis has important implications for the appropriate role of microcredit in the long-run development of a developing economy.

Compensation for commuting in imperfect urban markets

Abstract. We develop an urban equilibrium job search model with employed and unemployed individuals where residential mobility of the unemployed is restricted. We assume a standard mono‐centric model (firms are located in one location), but allow for imperfect labour markets. In contrast to models with perfect labour markets, the model predicts that the employed are only partially compensated for commuting costs in the form of wages. As a result, rent gradients are less steep than predicted by standard urban theories that assume perfectly competitive labour markets.Abstract. Desarrollamos un modelo urbano de equilibrio de búsqueda de empleo con individuos empleados y desempleados donde se restringe la movilidad residencial de los desempleados. Asumimos un modelo monocéntrico estándar (las empresas se sitúan en una única ubicación), pero se permiten mercados de mano de obra imperfectos. En contraste con modelos con mercados de mano de obra perfectos, el modelo predice que los empleados reciben en forma de salario solamente una compensación parcial de los costes de trasladarse al puesto de trabajo. Como resultado, los gradientes en el alquiler son menos pronunciados de lo que predicen las teorías urbanas estándar que asumen mercados de mano de obra perfectamente competitivos.

On the Effects of Wage Pressure on the Unemployment Rate and Capital Share

Abstract The purpose of this paper is to understand the behaviour of the capital share and the unemployment rate in Europe over the past quarter of a century. We consider a model with monopolistic competition, increasing returns and an imperfect labour market, assuming that the elasticity between capital and labour is less than unity. Previous works have generally assumed constant returns to scale. Our results offer an important conclusion, namely that increased wage pressure will increase the unemployment rate and the capital share even though the latter initially decreases, which fits the stylized facts about the studied economies.

Dynamic fiscal policies and unemployment in a simple endogenous growth model

This paper analyzes the growth and employment effects of dynamic fiscal policies in an overlapping generations model with endogenous growth and imperfect labour markets. With balanced-budget policies, the modelled closed economy grows at a constant rate which is higher, the lower are the labour tax rate and the unemployment rate. Constant-flow budget policies are not feasible, while government Ponzi games are feasible only if economic agents have implausibly high savings rates. Furthermore, while constant-stock fiscal policies are sustainable, an increase in the debt-to-capital ratio is accompanied by higher taxes, a rise in unemployment and lower economic growth.

A Poverty Trap of Crime and Unemployment

AbstractWe present an overlapping generation growth model with an imperfect labor market where the links among crime, growth and unemployment are jointly considered, both in an endogenous and exogenous set‐up. We test the major implications of our theory and verify the two model specifications through the Italian regional data, using the Pooled Mean Group estimator proposed by Pesaran, Shin and Smith (1999). The empirical results are in favor of the exogenous version of the model and suggest that crime and unemployment have long‐run income level effects.

Book Review: Labor Economics: Personnel Economics in Imperfect Labour Markets

Book Review: Labor Economics: Personnel Economics in Imperfect Labour Markets

Imperfect Labor Mobility and Unemployment in a Dual Economy*

AbstractThis paper examines the implications of imperfect labor mobility and unemployment in developing countries. We analyze the effects of wage subsidy policies, factor growth, and the change in labor mobility on unemployment and national income in an economy that is characterized by the existence of both imperfect labor mobility and urban unemployment.

Non-Wage Benefits, Costs of Turnover, and Labor Attachment: Evidence from Russian Firms

Just as in established market economies, many Russian firms provide non-wage benefits such as housing, medical care or day care to their employees. Interpreting this as a strategic choice of firms in an imperfect labor market, this paper examines unique survey data for 404 large and medium-size industrial establishments from 40 Russian regions. We find strong evidence that Russian industrial firms use social services to reduce the costs of labor turnover in the face of tight labor markets. The strongest effect is observed for blue-collar workers. We also find that the share of non-monetary compensation decreases with improved access to local social services.

Career-Hopping: Learning and Turnover in an Imperfect Labor Market

This paper studies a two-sector model of learning-by-doing that is partially transferable between sectors. There is a potential efficiency gain from intersectoral turnover when the sectors have different complementary production costs or learning curves of different steepness. If workers are liquidity constrained then there is a bias towards increased intersectoral turnover, resulting in socially inefficient career patterns. Excess turnover can even result in lower average productivity of workers in both sectors. If individual productivity is decreasing towards the end of the career, then a liquidity constraint on the young workers will also cause retirement to be delayed beyond the socially efficient retirement age.

A Model of Training Policies in an Imperfectly Labour Market

According to human capital theory training underinvestment can arise in case of imperfect competition in the labour markets and when workers are credit constrained. In both cases training policies have to be considered in order to increase the amount of training and to alleviate the consequences of underinvestment. The model developed in this paper puts in evidence the structure of costs and benefits on which the decisions of investment in human capital by firms and workers depend under the hypothesis of imperfect labour markets. Several options of training policy are analysed through the model and their outcomes compared for what concerns the level of training and other features like the distribution of costs and benefits and wage differentials between trainees and trained workforce. The second section draws a theoretical scheme of evaluation of training policies effectiveness in connection with the structural characteristics of the markets. The third section develops the model of analysis of the enterprises' choices relative to training under the hypothesis of an imperfect labour market and in the presence of different policies and of collective wage bargaining. The last section synthesizes main results and indicates some prospects of further research.

Firm Entry with an Imperfect Labor Market

Abstract An economy is considered in which new firms require time to learn whether they will grow in size and profitability in the long run. The labor market is imperfectly competitive. I show that inefficient levels of firm entry will generally exist. Whether under or over entry occurs is tightly related to the bargaining power of labor, but the logic behind my result differs dramatically from other work which has identified a similar link. The theory may shed some light on the continuing debate over the contribution of small firms to economic growth, and suggests that, in some cases, subsidizing small firms may be socially beneficial.

Price-Cost Margins and Rent Sharing: Evidence from a Panel of French Manufacturing Firms

This paper presents a model for estimating both the magnitude of price-cost margins and the extent of rent sharing. The model generalizes Robert Hall's model, relating the conventional measure of total factor productivity (the "Solow residual") to the degree of imperfect competition in product markets, by also allowing for the possibility of imperfect labor markets. It does so by assuming that the firm wages and level of employment are jointly determined according to an efficient bargaining scheme between the firm and its workers. One attractive aspect of Hall's framework is that it does not require a measure of the user cost of capital to assess the magnitude of markups, in contrast to more conventional analyses. Similarly, another interesting feature of our extended framework is that it does not require a measure of the alternative external wage to estimate the degree of workers' bargaining power, contrary to most studies on rent sharing. Our model is estimated on a panel of French manufacturing firms using the Generalized Method of Moments (GMM). We find that the lack of explicit consideration of labor market imperfection results in a large underestimation of the firm true markup, corresponding to the omission of the part of the firm rent captured by workers. Our estimate of average rent sharing is about 0.6, while our estimate of average price-cost margins is of an order of magnitude of 1.4, to be compared to 1.1 only, if rent sharing is ignored.

Fiscal adjustment and labor market dynamics in an open economy

This paper studies the labor market effects of fiscal adjustment in a two-sector, three-good intertemporal framework. Key features of the model are an informal sector, minimum wages, unionized labor in the formal economy, imperfect labor mobility, and public production of intermediate inputs. “Luxury” and wait unemployment prevail in equilibrium. It is shown that if unions care sufficiently about employment, and if the degree of openness is high, an increase in the price of government services may reduce unemployment in the steady state. A similar result would hold in an efficiency-wage setting if the “disciplinary effect” of unemployment is sufficiently strong.

Tax evasion, tax progression, and efficiency wages

More progressive taxes raise employment in imperfect labour markets. However, this prediction is not robust. For example, any employment effect vanishes in a constant profit efficiency wage economy. It is demonstrated that tax evasion opportunities can re-establish positive employment effects of higher tax progression.

Labor market distortions and China's WTO accession package:: an applied general equilibrium assessment

The economic implications of China's accession to the World Trade Organization have been analyzed using applied general equilibrium techniques. We explore the consequences of trade reform in the presence of labor market distortions. A formal model of imperfect labor mobility is incorporated into a large-scale, stochastic applied general equilibrium framework with which the consequences of China's trade reform for net welfare are considered. The simulations suggest that distortions in China's labor market, including imperfect labor mobility, rural-urban migration, dual urban markets and surplus rural labor, have significant effects on trade liberalization outcomes and in some cases produce unexpected second-best results. Journal of Comparative Economics 31 (4) (2003) 774–794.

Imperfect labor market and convergence: theory and evidence for some OECD countries

In this paper, we show the existence of a negative relationship between long run growth and labor market imperfections both theoretically and empirically. We consider a “monopolistic union” imperfect labor market in a neoclassical growth framework and show that labor market rigidity, captured by the mark-up over the reservation wage, does lower the growth rate along the transitional path. For policy purposes, this result implies that removing labor market imperfections in Europe is important not only for reducing unemployment but also for fostering output growth. In this respect, the traditional evaluation of these policies has greatly been underestimated for their beneficial effects on output growth. We verify empirically the convergence relationship implied by the model on a panel of 18 OECD countries using both traditional cross-countries growth regression and the system GMM estimator proposed by Arellano and Bover (1995) and Blundell and Bond (1998). The data support the basic implications of our model. In particular, the standard proxies for mark-up, the unemployment replacement ratio and union density, result to affect the long run growth rate negatively. We also analyze the relationship between growth and an alternative mark-up proxy based on Bean’s (1994a) insight: the ratio of per worker wage on per capita consumption. A negative and significant relationship between output growth rate and this mark-up proxy is found.

The Double Dividend Hypothesis of Environmental Taxes: A Survey

This survey reviews the recent literature on the double-dividend hypothesis of environmental taxes and discusses some extensions of the standard model such as the distributional consequences and the importance of the non-separability assumption between consumption goods and environmental quality for the optimal design of environmental policies. Turning to a model with imperfect labour markets we then show under which circumstances environmental taxes on polluting inputs in production and on polluting consumption goods can reap a second dividend in the form of an employment dividend and discuss the welfare implications. Finally, we turn to international aspects of environmental taxation. When environmental problems are tied to the use of exhaustible resources, resource-consuming countries can appropriate resource rents at the cost of resource-owning countries by levying environmental taxes strategically.

Unions and the Duty of Good Faith in Employment Contracts

Some American scholars of law and economics have expressed dismay at the anticompetitive and illiberal body of legal doctrine that is labor law.' Their respondents, often in other fields if not other countries, have defended unions and the laws that support them on both economic and ethical grounds. On the one hand, unions may contribute to efficient workplace governance and correct the monopsony power of employers in imperfect labor markets.2 On the other hand, by increasing workers' bargaining power vis-a-vis firms, unions may effectuate distributive social policies by winning workers a larger fraction of firms' surplus. By affording employees more control over their work, unions may also leave them less alienated in

Equilibrium Employment in a Model of Imperfect Labor Markets

This paper presents a simple model of imperfect labor markets with endogenous labor market participation and home production. We show that a two-sector economy (home and market) implies a three-state labor market when labor market imperfections take the form of an irreversible entry cost incurred by workers. This simple framework brings several results. First, it delivers an expression for the employment rate and as side-products, a measure of the unemployment rate and the size of the labor force. Second, it rationalizes several empirical works on the definition of unemployment in labor force surveys. Third, it derives endogenously all flows between three labor market states. Fourth, a calibration of the model rationalizes differences in employment rates: in the U.S., we find a market productivity premium of +30% and market frictions of -15% compared to France. Finally, the model is a very simple reduced form of search models with which it is fully consistent: the irreversible entry cost is the opportunity cost of search and depends on aggregate conditions.

The Distribution of Talent and the Pattern and Consequences of International Trade

I study the interaction between imperfect labor contracts and international trade in a setting in which workers have private information about their own abilities. When an individual’s contribution to firm output can be measured accurately in some activities but not in others, the most able workers select occupations in which their pay most closely reflects their own performance. In a world economy with two otherwise similar countries that have different distributions of talent, the country with the more heterogeneous labor force exports the good that is produced by the most talented individuals. In this country, trade exacerbates the “polarization” of the labor force and often worsens the distribution of income.