Labor Market Imperfections Research Articles

The Macroeconomics of Labor, Credit, and Financial Market Imperfections

The Macroeconomics of Labor, Credit, and Financial Market Imperfections

Distributional effects of immigration and imperfect labour markets

In canonical models, the labour share is orthogonal to immigration shocks in the long run, regardless of the impact of immigration on productivity. In contrast, this paper provides evidence that immigration increases labour productivity while reducing the labour share. We produce this evidence using data from Great Britain with a shift-share instrument that exploits European Union expansions and changes in immigration to other high-income countries. Our results are consistent with the predictions from imperfect labour market models, where immigrant and native workers are heterogeneous in skills, and the former have lower labour supply elasticities than the latter. A significant implication of our analysis is that immigration redistributes income from workers to employers.

Trade and technology adoption in distorted economies

This paper examines how labor market imperfections distort firm-level technology choices and alter the gains from trade in developing countries. Motivated by evidence that firms using modern technologies are disproportionately exposed to labor market distortions, we introduce firm-level technology choices and labor market distortions into an otherwise standard quantitative trade model. We then provide formulas for the welfare and labor productivity gains from trade liberalization, highlighting the role of distortions and technology choice. Our quantitative analysis reveals that labor market distortions provide a possible explanation for the inefficiently low levels of modern technology adoption in developing countries. Moreover, labor market distortions erode one-third of the potential labor productivity gains from trade liberalization among low-income countries.

Organized Labor, Labor Market Imperfections, and Employer Wage Premia

This article examines how collective bargaining through unions and workplace codetermination through works councils relate to labor market imperfections and how labor market imperfections relate to employer wage premia. Based on representative German plant data for the years 1999–2016, the authors document that 70% of employers pay wages below the marginal revenue product of labor and 30% pay wages above that level. Findings further show that the prevalence of wage markdowns is significantly smaller when organized labor is present, and that the ratio of wages to the marginal revenue product of labor is significantly larger. Finally, the authors document a close link between labor market imperfections and mean employer wage premia, that is, wage differences between employers corrected for worker sorting.

Nash equilibria in models of fiscal competition with unemployment

AbstractThis study examines two different fiscal competition games under labor market imperfections. Given that capital moves across regions and affects regional employment, governments must choose the expenditure level and tax rate on such mobile capital by accounting for the effects of fiscal variables on both capital and labor. Therefore, governments may play these games with either the tax rates on mobile capital or with public expenditures. The presence/absence of absentee ownership of capital and employment externalities are significant factors that characterize two distinct Nash equilibria, one that occurs with tax competition and the other with expenditure competition. Contrary to the existing literature, tax rates under tax competition are likely to be lower than those under expenditure competition owing to employment externalities. In some cases, governments prefer to choose government expenditure as their strategic variable rather than the tax rate. The presence of employment externalities motivates governments to use such expenditure as the variable through which it may strengthen strategic effects.

Labor market distortions in major emerging-market economies: Some CGE estimates

Purpose ― In the present study, the effects of labor market distortions on economic structure and efficiency are estimated for seven emerging-market countries: Brazil, China, Indonesia, India, Mexico, Russia, and Turkey. Methods ― The estimates are based on a computable equilibrium (CGE) model that allows simulation of the inter-industry links of 56 industries plus a sector representing the rest of the world from data collected in the World Input-Output Database (Release 2016) for the period 2000-2014. Findings ― The results show that wage differentials appear to be distortionary, especially in the cases of countries with high wage-income inequality. Moreover, it seems that labor market distortions in emerging-market countries are subject to the rural-urban dichotomy and urban labor-market imperfections. Finally, the results show that the removal of wage differentials affects the terms of trade, which are improved in most but not all cases.Implication ― The conclusions of the present study have policy implications. In countries where the rural-urban dichotomy is the main distortion in labor markets, increasing urbanization can stimulate efficiency; when this is not the case, further reform of urban labor markets is needed. However, it cannot be ruled out in advance that a policy aimed at enhancing labor mobility may have a negative impact on the terms of trade. Originality ― The estimation method used in the present study presents certain advances over others found in the literature, as it becomes possible to estimate the effects of labor-market distortions while considering the interdependencies between different sectors, as well as to plausibly estimate the effects on trade. The present study also uses a large quantity of data, which is expected to add robustness to the study’s conclusion.

Gender and agricultural Productivity: Econometric evidence from Malawi, Tanzania, and Uganda

Agricultural productivity gaps between men and women have been widely documented in many sub-Saharan African countries. Fundamentally, though, we contend that women have the same inherent intellectual (and thus farm management) capabilities as men but are inhibited by local conditions that put them at a disadvantage. We, therefore, hypothesize that by controlling for observed socio-economic, geographic, and agro-ecological characteristics, gender related farm productivity gaps would fade. Drawing on the Living Standards Measurement Study–Integrated Surveys on Agriculture for Malawi, Tanzania, and Uganda, we first match on observables to select comparable plots managed by male and female farmers, then estimate correlated true random effects stochastic production frontiers, followed by a meta-frontier to examine total factor productivity (TFP) and benchmarked technical efficiency. At the core of our approach is controlling for systematic observed and unobserved heterogeneity that could bias the comparative analysis. Results are mixed, but they tend to support our hypothesis. In Malawi, where we find market imperfections favor female farmers, women are more efficient than are male farmers and they exhibit TFP performance parity. In contrast, Tanzanian and Ugandan labor market imperfections favor male farmers, as do efficiency and TFP performance estimates.

The Dual U.S. Labor Market Uncovered

Aggregate U.S. labor market dynamics are well approximated by a dual labor market supplemented with a third, predominantly, home-production segment. We uncover this structure by estimating a Hidden Markov Model, a machine-learning method. The different market segments are identified through (in-)equality constraints on labor market transition probabilities. This method yields time series of stocks and flows for the three segments for 1980-2021. Workers in the primary sector, who make up around 55 percent of the population, are almost always employed and rarely experience unemployment. The secondary sector, which constitutes 14 percent of the population, absorbs most of the short-run fluctuations, both at seasonal and business cycle frequencies. Workers in this segment experience six times higher turnover rates than those in the primary tier and are ten times more likely to be unemployed than their primary counterparts. The tertiary segment consists of workers who infrequently participate in the labor market but nevertheless experience unemployment when they try to enter the labor force. Our individual-level analysis shows that observable demographic characteristics only explain a small part of the cross-individual variation in segment membership. The combination of the aggregate and individual-level evidence we provide points to dualism in the U.S. labor market being an equilibrium division of labor, under labor market imperfections, that minimizes adjustment costs in response to predictable seasonal as well as unpredictable business cycle fluctuations.

The Specific Behavior of Economic Agents with Heterogeneous Expectations in the New Keynesian Model with Rigid Prices and Wages

The purpose and scientific novelty of this work is to analyze the changes and features of economic agents’ behavior when incorporating wage rigidity into a new Keynesian model under cognitive constraints of agents. The working hypothesis is the assumption that the forecasting of the output gap, inflation of prices and wages occurs with the help of fundamentalist and extrapolation rules. The first rule is based on forecasting the variables under study on the basis of their stationary values. The second rule is based on extrapolation of the latest available data on inflation and the output gap. The weight shares of agents applying these heuristic rules change endogenously, which is the source of endogenous waves of optimism and pessimism. An analysis of the impulse responses of interest rate and technology shocks suggests that a more flexible economy (an economy with flexible wages and rigid prices) is less prone to a spike in the economic cycle caused by waves of optimism and pessimism than a more rigid economy (an economy with rigid prices and wages) due to the inability of agents to respond immediately to exogenous disturbances in rigid conditions. Thus, these shocks cause wave effects in the economy, i.e., cyclical movements, i.e., a rigid economy will be more prone to booms and busts caused by alternating optimism and pessimism than a flexible economy. The model with an imperfect labor market is characterized by an increased concentration of vital forces at the values of 0 and 1, as well as in the mid-distribution compared to the base model. This feature provides a key explanation for the abnormal dynamics of the evolution of variables in this model. It is concluded that the difference between the degree of optimism and pessimism in the base model and in the model with rigid wages and prices is the full trust of agents in the central bank in targeting wage inflation in the absence of the stabilization of this inflation by the bank.

Farm size and productivity: smallholder dairy production in Eswatini

ABSTRACT In response to the 2015 paper by Henderson published In Journal of Agricultural Economics, this case study of dairy farmers in Eswatini, this case study of dairy farmers in Eswatini tests the explanatory power of two hypotheses to explain the inverse relationship between farm size and productivity. To this end, we fit a stochastic frontier production function with inefficiency effects. We find that dairy farmers who use hired labour are significantly less efficient than those who use own and family labour. This supports the labour market imperfections hypothesis. To test the technical efficiency hypothesis, we segment our sample into small, medium and large farmers based on the number of cows in milk. We find that small farmers are the most efficient (78.5%), followed by medium (75.9%) and large (75.1%) farmers, but the differences are not statistically significant. This supports Henderson's finding that differences in efficiency affect productivity but not enough to disqualify labour market imperfections as the principal explanation for the inverse relationship.

Effect of sticky Wages on the Behavior of Economic Agents with Heterogeneous Expectations

The aim of the work is to analyze the changes and behavioral features of economic agents when wage rigidity is incorporated into the new Keynesian model in comparison with the model with flexible wages and rigid prices under cognitive constraints of agents. The relevance of the work lies in the fact that the model under study is able to describe the typical features of the movement of a real business cycle. The working hypothesis is an assumption that the forecasting of the output gap, inflation of prices and wages occurs with the help of fundamentalist and extrapolation rules. The first rule is based on the prediction of the studied variables based on their stationary values. The second rule is based on the extrapolation of the latest available data for the variables under study. The weight shares of agents applying these heuristic rules change endogenously, which is the source of endogenous waves of optimism and pessimism, and the scientific novelty of the analysis of models with an imperfect labor market. An analysis of the impulse responses of an interest rate shock and a technological shock suggests that a more flexible economy (an economy with flexible wages and rigid prices) is less prone to an abrupt economic cycle caused by waves of optimism and pessimism than a more rigid economy. These shocks cause ripple effects in the economy, meaning that a tight economy will be more prone to booms and busts driven by alternating optimism and pessimism than an agile economy. It is concluded that the difference between the degree of optimism and pessimism in the base model, as well as in the model with rigid wages and prices, is the full trust of agents in the Central Bank in targeting wage inflation in the absence of stabilization of this inflation by the bank. The practical significance of the work lies in the fact that the results obtained may be useful in stabilizing the considered variables under the monetary policy of the Central Bank.

Does Offshoring Shape Labor Market Imperfections? A Comparative Analysis of Belgian and Dutch Firms

Does Offshoring Shape Labor Market Imperfections? A Comparative Analysis of Belgian and Dutch Firms

Fiscal Policy, Economic Integration and Unemployment

In this paper fiscal policy is examined for an open economy characterised by unemployment due to efficiency wages. We allow for capital and firm mobility in a model where the government chooses the level of wage, source-based capital and profit taxation. The taxing choices of governments are analyzed in scenarios which differ with respect to the constraints imposed on the set of available taxes and on the mobility of firms. As a general result, the welfare loss from labour market imperfections increases when tax bases become internationally mobile, which suggests an increasing relevance of domestic labour-market reforms when tax bases become global.

Product and labour market imperfections in the Italian manufacturing sector: a firm-level analysis

Product and labour market imperfections in the Italian manufacturing sector: a firm-level analysis

Elite Pipelines: How Elite School Ties Are Reflected in Interfirm Employee Migration

Recent research has pointed to pipelines, or sequenced hiring of individuals from the same source organizations over time, as a common practice employed by firms to reduce labor market imperfections and create human capital resource advantages. We extend this literature by considering how pipelines may emerge not just out of strategic intent but also out of informal social processes reflecting network transitivity and homophily. Using bipartite social network analysis techniques in a sample of 110 public U.S. electronics component manufacturers, we argue and find evidence for transitive effects between firms’ employee-based ties to elite educational institutions and the formation of interfirm employee pipelines. We demonstrate that pipelines are more likely to form between firms that both hire educational elites, especially when those firms share ties to the same elite schools and when those shared elite schools are executives’ alma mater(s). We also find that these effects tend to be more pronounced when the focal firm has higher growth potential, encouraging mobility by attracting potential elite candidates and facilitating the two-way matching process in labor markets. Our theory and findings contribute to a better understanding of informal processes underlying pipeline formation and specifically demonstrate how hiring tendencies may lead to closed recruiting networks characterized by elite replication.

Skill-biased technical change and labor market inefficiency

The economic literature has so far produced limited (country-level) evidence on the magnitude of skill-biased technical change (SBTC), and has not yet investigated the extent to which, coupled with labor market imperfections, SBTC is associated with inefficient use of labor. We present a novel approach to estimate SBTC allowing for the presence of labor market inefficiency. Using data taken from the World Input-Output Database across 38 countries and 30 sectors, we provide the first country-sector evidence of SBTC during the 1995–2005 period and quantify the extent of economic inefficiency arising from labor market imperfections. On average, we find that the productivity of skilled workers grows by approximately 11.5% more than that of unskilled workers, mostly driven by SBTC (13.7%), rather than factor accumulation (−2.1%). Economic inefficiency decreases by 10.5% on average, and labor market rigidities are more binding in sectors that are more exposed to technological change. Substantial heterogeneity is also observed.

COMPARATIVE ANALYSIS OF THE DIFFERENTIATION OF WAGE RATES IN RUSSIA AND IN THE UNITED STATES

The purpose of this study is a comparative analysis of the factors affecting the differentiation of wage rates in Russia and the United States. The information base for the study was statistical and analytical materials given on the official websites of the Russian Federation and the United States. The article presents an extensive analysis of the wage levels depending on the professional training of employees. Based on statistical data, the authors substantiate why in Russia and the United States the wages of employees with higher professional education are significantly higher than the wages of employees with secondary education, not to mention employees without secondary education. Much attention is paid to the consideration of the differentiation of wage levels with respect to the type of the economic activity. It is shown that in Russia and the United States, despite significant differences in the structure of the economy and economic potentials, the highest earnings prevail in the extractive industries, primarily in the fuel and energy complex. On the other hand, wages in the light and food industries, as well as in agriculture in Russia and the United States are about 20 and 33% of the above-mentioned industries, respectively. The article also examines the differentiation of wages in relation to racial characteristics and gender differences. Citing a number of factual data from Russia and the United States, the authors show that such differentiation in the 21st century should be qualified in terms of labor market imperfections from both scientific and social points of view. The regional aspect of the wage difference in both countries is also analyzed in detail. It is explained why the regional factor has almost no effect on the size of the average wage in the United States contrary to Russia. It is concluded that the most effective mechanism for regulating wage levels is competition in the labor market, which puts the qualifications, skills and experience of employees, as well as working conditions, as the basis for wage differentiation.

Welfare and economic impacts of Fair Pay Agreements in Aotearoa

ABSTRACT This paper performs the first quantitative economic analysis of the proposed Fair Pay Agreement (FPA) and analyses the welfare (or wellbeing) implications and economic effects of the proposed FPA for Aotearoa New Zealand. The new FPA system is designed to address weaknesses of the labour market in Aotearoa. Using a standard dynamic macroeconomic model with labour market imperfections via search and matching frictions calibrated for Aotearoa New Zealand, we simulate the macroeconomic and welfare effects of the FPA. To be precise, we model an increase in worker’s bargaining power. We find that this labour market reform will reduce overall welfare (or wellbeing) in the economy and will lead to increased unemployment, lower production and incomes, and higher inflation. In conclusion, while the reform will increase wages, it will reduce overall welfare and harm the economy and should, therefore, not be implemented.

Does fuel price subsidy work? Household energy transition under imperfect labor market in rural China

Dependence on traditional biomass energy, such as crop residues and firewood, has a number of negative impacts on sustainable rural livelihoods in many developing countries. Subsidizing modern fuels has been adopted by many governments and development agencies to increase the adoption of modern clean fuels, however, its effectiveness on rural energy transition away from traditional biomass energy is rarely investigated. This paper seeks to understand the effectiveness of fuel price subsidies based on a non-separable agricultural household model. We developed a theoretical framework explaining household behavioral responses to price incentives in the presence of labor market imperfections and tested this framework with rural household data in China. We found that the policy interventions focusing on fuel pricing are largely ineffective in promoting household energy transition partly due to imperfect rural labor markets. This finding has important policy implications for accelerating energy transitions. Based on our findings, we recommend that more attention needs to be paid to non-price mechanisms, such as providing technical support (e.g. increasing R&D investment in exploring new energy technologies and providing demonstration projects), constructing accompanying modern energy infrastructures, providing off-farm employment opportunities, and establishing a sound and effective social safety.

Tastes for discrimination in monopsonistic labour markets

This paper presents a model where wage differences between men and women arise from taste-based discrimination, monopsonistic mechanisms and gender differences in compensating wage differentials. We show how preferences against women affect heterogeneity in firms’ pay policies in the context of an imperfect labour market with non-wage amenities, deriving a test for the presence of taste-based discrimination and of compensating wage differentials. These results inform an analysis of sex pay differences in the Italian manufacturing sector, which shows that preferences for workplaces providing more flexible schedules are a significant determinant of the gender wage gap. Taste-based discrimination mechanisms appear to be significant as well, but small in size.