Labor Market Imperfections Research Articles

Panel Data Estimates of the Production Function and Product and Labor Market Imperfections

Panel Data Estimates of the Production Function and Product and Labor Market Imperfections

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.

Why do parents make their children work? A test of the poverty hypothesis in rural areas of Burkina Faso

It is often argued that child labour is caused by poverty. However, much child labour takes place in rural areas characterized by substantial labour market imperfections. A model of rural household labour supply is developed that provides testable implications for two versions of the poverty hypothesis: that child labour is due to a binding subsistence constraint and that child leisure is a luxury good. We find that in rural Burkina Faso children do not provide labour to meet households' subsistence needs and that child leisure is a normal good. The evidence suggests that labour market imperfections are a main reason for using child labour.

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

Optimal Fiscal and Monetary Policy with Sticky Wages and Sticky Prices

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominal riskless debt, and money creation. One main result is that sticky wages alone make price stability optimal in the face of government spending shocks, to a degree quantitatively similar as sticky prices alone. With productivity shocks also present, optimal inflation volatility is higher, but still dampened relative to the fully-flexible economy. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. We also show that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Interestingly, a necessary condition for the ability to use the nominal interest rate for this purpose is positive producer profits. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of labor market imperfections that are widely-believed to be important.

Optimal fiscal and monetary policy with sticky wages and sticky prices

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominally risk-free debt, and money creation. Our main result is that sticky wages alone make price stability optimal in the face of shocks to the government budget, to a degree quantitatively similar as sticky prices alone. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. Our results thus show that when nominal wages are sticky, setting real wages as close as possible to their efficient path is a more important goal of optimal monetary policy than is financing innovations in the government budget via state-contingent inflation. A second important result is that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of a type of labor market imperfection that is widely-believed to be important.

A note on unemployment and capital tax competition

We introduce a labor market imperfection into the capital tax competition literature to study the equilibrium tax formulae and their efficiency in the presence of unemployment. Since we allow for labor market imperfection, the standard conclusions of the tax competition literature would be generalized in the case of non-full employment. Our first result shows that even when head taxes on immobile residents are available, the optimal capital tax rate for jurisdictional governments is not zero. Our second finding is that decentralized equilibrium might be characterized by the overprovision of local public goods when the labor market is imperfect.

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.

Economic liberalization and wage inequality in the presence of labour market imperfection

This paper is purported to analyze the consequences of liberalized economic policies on the skilled–unskilled wage inequality in the developing countries using a three sector general equilibrium model reasonable for at least a few developing economies. The analysis of the paper has found that the wage inequality rises unambiguously due to a reduction of import tariff from the low-skill manufacturing sector. However, an inflow of foreign capital produces a favourable effect on the wage inequality under a reasonable factor intensity condition. Interestingly, contrary to the common wisdom, a policy of labour market reform may raise the competitive unskilled wage and improve wage inequality under reasonable condition.

The Rationale for Occupational Pensions

Employers and employees have no incentive to include pensions as part of employment contracts unless the pension completes a missing market, or ameliorates an imperfection in existing capital or labour markets. We examine the influence on the choice and design of occupational pensions of capital- and labour-market imperfections. In capital markets, we focus on basis risks, taxation, employer default risks, transactions costs, portfolio restrictions, and liquidity constraints. Aspects of labour markets affecting occupational pensions may be the presence of firm-specific human capital, asymmetric information between firms and potential hires, the presence of moral hazard, and internal labour markets in firms which cause employers to attempt to control the retirement behaviour of workers. The implications of this analysis of occupational pensions for public policy towards pensions are briefly examined.

Employment and growth in an aging society: a simulation study for Austria

In this study we use a long run macroeconomic model for Austria to simulate the effects of aging on employment, output growth, and the solvency of the social security system. By disaggregating the population into six age cohorts and modelling sex specific participation rates for each cohort we are able to account for the future demographic trends. Apart from a baseline scenario, we perform three alternative simulations that highlight the effects of aging from different perspectives. These include (1) purely demographic developments, (2) increasing labour market imperfections, and (3) higher economic growth due to a productivity shock.

Families and firms: Agency costs and labor market imperfections in Sialkot's surgical industry

The family firm is generally viewed as an organizational solution to agency costs in the labor market for managers and institutional underdevelopment. Consistent with this view, this paper links the preponderance of family firms in the surgical instrument industry of Sialkot to the prevailing agency and institutional problems. However, strong dependence on family management coupled with restrictions on family size constrains the firms from optimally choosing management size. The resulting labor market distortion is manifested by a significant positive correlation between the founder's family size and the firm size such that the founders who have more brothers (a larger pool of potential managers) end up with bigger firms.

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.

Economic Liberalization and Wage Inequality in the Presence of Labour Market Imperfection

Removal of tariff restrictions from the relatively low-skill sectors; growth in foreign direct investment; and, decline of trade union strength of the unskilled workers are cited in the empirical literature as the prime factors responsible for the growing incidence of wage inequality in many of the developing countries in the liberalized trade and investment regime. This paper has made an attempt to provide a theoretical foundation of those empirical findings in terms of a three sector general equilibrium model reasonable for at least a few developing economies. The analysis of the paper has found that the wage inequality rises unambiguously due to policies like an increase in the relative price of the high-skill commodity and a reduction of import tariff from the low-skill manufacturing sector. However, an inflow of foreign capital produces a favourable effect on the wage inequality under a reasonable factor intensity condition. Interestingly, contrary to the common wisdom, a policy of labour market reform may raise the competitive unskilled wage and improve wage inequality under reasonable condition.

Optimal Fiscal and Monetary Policy with Sticky Wages and Sticky Prices

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominal riskless debt, and money creation. One main result is that sticky wages alone make price stability optimal in the face of government spending shocks, to a degree quantitatively similar as sticky prices alone. With productivity shocks also present, optimal inflation volatility is higher, but still dampened relative to the fully-flexible economy. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. We also show that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Interestingly, a necessary condition for the ability to use the nominal interest rate for this purpose is positive producer profits. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of labor market imperfections that are widely-believed to be important.

Environmental Policy, Efficient Taxation and Unemployment

In this paper, I consider environmental policy as part of a mixed tax problem with a general income tax and linear commodity taxes. I assume that the wage rate is determined by bargaining between unions and firms. The results show that the change in the number of employed persons, following a change in the use of a tax instrument, affects the optimal tax structure via two channels; (i) it makes the tax revenues available for public expenditures more or less costly to collect, and (ii) it affects the aggregate demand for the good that causes the environmental damage. This means that the use of taxation to counteract the labor market imperfection is not easily separated from the environmental aspects of tax policy.

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.