Labor Market Imperfections Research Articles

Comment on “Has Abenomics Succeeded in Raising Japan's Inward Foreign Direct Investment?”

Cross-country evidence indicates that Japan hosts little inward foreign direct investment (FDI), even after taking into account its size and geographical or cultural distance from potential investors. Hoshi (2018) is a judicious empirical assessment of the impact of Abenomics on Japan's ability to attract inward FDI, and, by extension, increase the nation's rate of economic growth. Hoshi reaches a skeptical conclusion as to whether Abenomics has contributed to increasing inward FDI. The Abenomics target goal for FDI may be attained, but according to Hoshi's analysis, the goal has been set too low and its achievement does not require any positive impact of Abenomics policies. That skepticism may well be justified. However, before accepting this conclusion it may be worth making the simple observation that insufficient time may have elapsed for the effects of Abenomics to manifest. The policy initiative was first announced in 2013, but some of the measures discussed in the present paper were introduced as recently as May 2016. It is possible that Abenomics will eventually work as intended, but it is just too early to tell. Hoshi correctly observes that from a theoretical perspective the impact of inward FDI flows on growth is ambiguous and the empirical literature generally concludes that inward FDI flows are only growth-enhancing conditional on financial sector development and outward orientation. The latter is particularly important, insofar as a plausible theoretical example of immiserizing capital inflows is FDI induced into a protected capital-intensive import-competing sector (Bhagwati & Srinivasan, 1983). The samples used by much of the empirical literature cited by Hoshi include developing countries where capital inflows into a protected sector of comparative disadvantage is a real problem, or are restricted to FDI into the manufacturing sector. Therefore, it is not evident that this cross-country evidence is entirely applicable to Japan. While exchange in differentiated products is pervasive in modern economies, one would not necessarily expect Japan to gain a lot from foreign investment in its dominant sector either directly or via interfirm externalities and spillovers. Yet even in this relatively inauspicious setting, analysis of firm-level Japanese data indicates that there are significant benefits to foreign investment in the manufacturing sector. The positive result for manufacturing suggests that the gains for Japan from investment in its lagging service sector, which has traditionally been sheltered via regulation from entry by either new domestic or foreign service providers, could be even more profound (Fukao, 2013). It is partly due to this lack of local presence by foreign service providers that historically Japan has been a dramatic outlier relative to other major industrial countries in the share of domestic sales accounted for by foreign firms (Bergsten & Noland, 1993). Given the relatively scant presence in Japan of foreign service providers, and Japan's evident competitive challenges in the service sector, increased inward FDI in the service sector could have a significant impact on domestic productivity, and, at least during a transitional period, the economic growth rate, thus fulfilling the promise of Abenomics. So, how could Abenomics increase FDI into Japan? Discouragingly, many of the robust correlates with inward FDI identified in Hoshi's paper such as physical and cultural remoteness, and parent gross domestic product (GDP) and per capita GDP, are exogenous and not susceptible to policy intervention. And even more discouragingly, there appears to be a disconnect between the conditions amenable to policy intervention that might promote FDI and what the government is doing. One approach could be a sharper, if not targeted, approach to inward FDI which would emphasize the removal of barriers to entry in the service sector. A government survey summarized in Hoshi (2018, Table 1) found that the “high cost of doing business” was the single most frequent complaint, with three-quarters of the respondents identifying it as a barrier to FDI. Apart from regulation, capital and labor market imperfections could be important. Addressing labor market policies that discourage interfirm labor mobility appear to be particularly salient. It is striking that among the factors inhibiting FDI into Japan listed in Hoshi's Table 1, “difficulty in securing personnel” is the only one that increased significantly between the 2012 and 2016 surveys, rising more than 10% points to 46%, indicating that the problem is both important and worsening. Such an approach of addressing basic factor market and regulatory inhibitions on business, would not only benefit potential foreign entrants, but could also contribute to revitalizing domestic entrepreneurship by making it easier to establish – and expand – vibrant new businesses (Noland, 2007), precisely the sort of structural change that the third arrow of Abenomics is supposed to promote.

Employment impacts of renewable energy policies in China: A decomposition analysis based on a CGE modeling framework

Employment impacts are one of the most important social impacts associated with the development of renewable energy, and are also one of the key concerns for policy makers designing renewable energy policies. Current studies tend to focus on the direct job changes in renewable sectors per se and on the indirect job changes along value chains of renewable energy, therefore depicting a picture of prosperity with large amounts of “green jobs”. However, the induced job changes in other sectors that are not directly in the value chains but are still influenced by electricity price changes and related financial resource transfers have usually been neglected, resulting in an incomplete and potentially biased understanding of this specific category of social impact. By using a computable general equilibrium (CGE) model of China that incorporates detailed renewable power generation technologies and considers labor market imperfections, our study tries to fill this gap and quantifies the full scope of job changes (direct, indirect and induced) brought by renewable energy development in China. Results show that per 1 TW h expansion of solar PV and wind power would create up to 45.1 thousand and 15.8 thousand, respectively, direct and indirect jobs in China. However, the scale of induced job changes is quite significant and may even lead to net job losses in the whole economy in some cases. We have further revealed the sectoral contributors to total job changes. In all, there are no assured conclusions on the occurrence of green jobs when developing renewable energy. The impacts are highly dependent on the species of renewable energy, the financing mechanisms for renewable subsidies, and the scopes of employment impacts. We suggest that full-scope employment impacts should be carefully considered and the detailed supporting policies should be carefully designed by decision makers when promoting renewable energy.

Konkurencyjność gospodarki Polski na tle gospodarek krajów Europy Środkowo-Wschodniej UE11

Celem opracowania było ukazanie międzynarodowej pozycji i zdolności konkurencyjnej polskiej gospodarki na tle innych krajów nowo przyjętych do Unii Europejskiej w latach 2007-2017. Stwierdzono, że w rankingu konkurencyjności World Economic Forum analizowane kraje znalazły się powyżej trzydziestej pozycji. W ostatnim dziesięcioleciu nastąpiło pogorszenie pozycji konkurencyjnej w przypadku większości analizowanych krajów, natomiast Polska poprawiła pozycje konkurencyjną o 19 pozycji i znajduje się obecnie na 36 pozycji. Główną słabością polskiej gospodarki jest zbyt mała jej innowacyjność, niewystarczająca efektywność rynku pracy oraz niedoskonałość instytucji wspierających gospodarkę.

Financial constraints in search equilibrium: Mortensen Pissarides meet Holmstrom and Tirole

A key lesson from the Great Recession is that firms’ leverage and access to finance are important for hiring and firing decisions. It is now empirically established that bank lending is correlated with employment losses when credit conditions deteriorate. We provide further evidence of this and make causal inferences on the effect of leverage on job losses drawing on a new firm-level dataset that we assembled on employment and financial positions of European firms. Yet, in the Diamond Mortensen Pissarides (DMP) model there is no role for finance. All projects that display positive net present values are realized and financial markets are assumed to be perfect. What if financial markets are not perfect? Does a different access to finance influence the firm’s hiring and firing decisions? The paper uses the concept of limited pledgeability proposed by Holmstrom and Tirole to integrate financial imperfections and labor market imperfections. A negative shock wipes out the firm’s physical capital and leads to job destruction unless internal cash was accumulated by firms. If firms hold liquid assets they may thus protect their search capital, defined as the cost of attracting and hiring workers. The paper explores the trade-off between size and precautionary cash holdings in both partial and general equilibrium. We find that if labor market frictions disappear, so does the motive for firms to hold liquidity. This suggests a fundamental complementarity between labor market frictions and holding of liquid assets by firms.

Subsidizing healthcare in the presence of market distortions

The paper develops a three-sector full-employment general equilibrium model for a small open developing economy with exogenous labour market imperfection and a non-traded sector providing healthcare services, the consumption of which generates positive externalities. Our main objective is to show that the optimal consumption subsidy to healthcare, if solely judged from the standpoint of economic growth, is strictly positive (zero) when the production technology of the healthcare sector is of the variable (fixed) coefficient type. However, in the variable coefficient case, the optimal per capita expenditure on healthcare crucially hinges on the degree of labour market imperfection and the quality of services provided by the healthcare sector. The latter result can possibly be considered as a theoretical justification why the magnitude of per capita public spending on healthcare services is significantly lower in the developing countries compared to that in the developed nations. Besides, using the Sen's (1974) index of social welfare that takes into consideration both the growth and income inequality aspects, we have proved that the optimal health subsidy is positive irrespective of the nature of production technology of the healthcare sector. Furthermore, most of these results are found to be valid even in the presence of Harris-Todaro type unemployment. Finally, the results lead to a few important policy implications in the context of the developing countries.

Employment protection and the market for innovations

We study the effects of employment protection taking into account that firms can – as a second best response – invest in R&D or buy new technologies in order to restore their productivity. To do so we develop an equilibrium matching model with an imperfect labor and innovation market. If employment protection is introduced, firms’ willingness to pay for product or process innovations increases. This shifts economic activity towards firms specializing in process and product innovation and triggers entry of new start-ups. We calibrate our model to match aggregate US labor and product market statistics and show that our model generates the negative impact of wrongful dismissal laws in the US on productivity and the positive effect on the number of innovations and firms found by the literature.

Underinvestment and Unemployment: The Double Hazard in the Euro Area

Abstract An alarming legacy of the austerity programs in the euro area is the vast disinvestment that has taken place over the recent years, and especially so in the peripheral economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but also undermines the prospects of a gradual reduction of unemployment and risks further imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model with labour market imperfections, the paper shows that unemployment is a function of capital investment under either CES or Cobb-Douglas production functions. A cross-section estimate for the euro area economies confirms the theoretical findings. JEL Codes: E22, E24

Labor Market Imperfections, Markups and Productivity in Multinationals and Exporters

This paper examines the links between the internationalization mode of firms and market imperfections in product and labor markets. We develop a framework for modelling heterogeneity across firms in terms of (i) product market power (price-cost markups), (ii) labor market imperfections (workers' bargaining power during worker-firm negotiations or firm's degree of wage-setting power) and (iii) revenue productivity. We apply this framework to analyze whether the pricing behavior of firms in product and labor markets differs across firms that engage in different forms of internationalization. Engagement in international activities is found to matter for determining not only the type of imperfections in product and labor markets but also the degree of imperfections. Clear differences in behavior between firms that serve the foreign market either through exporting or through FDI are observed. Being an exporter introduces allocative inefficiencies in product as well as labor markets as we find export status to be positively correlated with both product market power (markups) and market power consolidated on the labor supply side (workers' bargaining power). But exporting firms where search frictions are inducing wages to vary with revenue are less able to exploit wage-setting power. Firms with foreign subsidiaries, on the other hand, seem to reduce price distortions in product and labor markets. In addition, we observe heterogeneous returns to being an exporter/MNE within an industry and also discern cross-industry differences.

Gender gap in agricultural productivity in Nigeria: A commodity level analysis

This study assesses gender gap in agricultural productivity across selected major crops grown by Nigerian farmers including cassava, yam, maize, guinea corn, bean and millet. The data for the study is sourced from the Living Standards Measurement Study-Integrated Surveys on Agriculture for the year 2012/2013. The pairwise mean comparisons was applied to determine the extent of gender gap in agricultural productivity, inputs access and other variables; while non-parametric quantile regression technique was employed to assess the relationship between input use and gender gaps in farm outputs. The key finding is that gender gaps in farm output is low with quantity harvested and harvest sales of male managed plots marginally higher than female managed plots by 0.22% and 6.24%, respectively. The gender productivity gaps vary across selected crops and it is more pronounced in cassava, yam and maize production, while it is mild in other crops. The gender farm productivity gaps are traceable to longer farming experience in favour of men and labour market imperfection which is biased against women. Hence, labour market imperfections against women need to be addressed. This requires a formalized farming system which is presently lacking in Nigeria.

Labor Market Imperfections, Markups and Productivity in Multinationals and Exporters

This paper examines the links between the internationalization mode of firms and market imperfections in product and labor markets. We develop a framework for modelling heterogeneity across firms in terms of (i) product market power (price-cost markups), (ii) labor market imperfections (workers' bargaining power during worker-firm negotiations or firm's degree of wage-setting power) and (iii) revenue productivity. We apply this framework to analyze whether the pricing behavior of firms in product and labor markets differs across firms that engage in different forms of internationalization. Engagement in international activities is found to matter for determining not only the type of imperfections in product and labor markets but also the degree of imperfections. Clear differences in behavior between firms that serve the foreign market either through exporting or through FDI are observed. Being an exporter introduces allocative inefficiencies in product as well as labor markets as we find export status to be positively correlated with both product market power (markups) and market power consolidated on the labor supply side (workers' bargaining power). But exporting firms where search frictions are inducing wages to vary with revenue are less able to exploit wage-setting power. Firms with foreign subsidiaries, on the other hand, seem to reduce price distortions in product and labor markets. In addition, we observe heterogeneous returns to being an exporter/MNE within an industry and also discern cross-industry differences.

Unemployment, Fiscal Stimulus Policy, and Debt Sustainability in an Endogenous Growing Economy

This study investigates how the government fiscal stimulus policy affects public-debt sustainability and the unemployment rate. We analyze an economy with an imperfect labor market in which the government maintains its budget from tax revenue and public debt. We assume that the government's income transfer is fiscal stimulus policy and show that the policy reduces the unemployment rate, increases the economy's growth rate, and raises the threshold of the ratio of public debt to private capital that is needed to sustain public debt. The arguments presented show that an income transfer policy may generate an economy that not only is sustainable with regard to public debt but also has a low unemployment rate in the long run.

What Does Compensation of Portfolio Managers Tell Us about Mutual Fund Industry? Evidence from Israeli Tax Records

We study the determinants of compensation in the mutual fund industry using Israeli tax records. The portfolio manager compensation is influenced by fund flows driven by past raw returns. Managers are thus paid equally for fund superior performance and for the fund’s passive benchmark returns. We interpret these results though a model that combines trust-mediated money management in the spirit of Gennanioli, Shleifer and Vishny (2015) and imperfect labor market competition. In our model, compensation and fund size are jointly determined by expected raw returns and by the level of intermediary’s trustworthiness. Additional empirical evidence confirms the distinct model predictions.

The Characteristics of Domestic Firms: Materializing Productivity Spillovers from FDI

ABSTRACTUsing detailed firm-level data from Turkey, for 1991–2001, we analyze the importance of domestic firm capabilities in allowing for productivity spillovers from foreign direct investment. The absorptive capacities we investigate are technology gap, export status, and human capital of domestic firms. The study contributes to the literature by offering an alternative measure of human capital that would be more relevant in a country where there are labor market imperfections. The results provide supporting evidence for the role played by the human capital of domestic firms, i.e., the ratio of skilled, in realizing mainly horizontal spillovers.

Markups and bargaining power in tradable and non-tradable sectors

This article jointly estimates product and labour market imperfections for narrowly defined sectors in the Portuguese economy for the period 2006–2009, following Roeger (J Polit Econ 103(2):316–330, 1995), Crepon et al. (Ann Econ Stat (79/80):583–610, 2005), Dobbelaere (Int J Ind Organ 22(10):1381–1398, 2004) and Abraham et al. (Rev World Econ 145(1):13–36, 2009). In addition, we propose a criterion for the identification of tradable and non-tradable sectors based on the export-to-sales ratio and compare markups and workers’ bargaining power along this dimension. Our findings suggest that markups are higher in the non-tradable than in the tradable sector but workers’ bargaining power is similar. In addition, there is a significant level of heterogeneity across markets, particularly in the non-tradable sector. Moreover, the article confirms that, if labour market imperfections are disregarded, markups are significantly understated.

Endogenous labour market imperfection, foreign direct investment and external terms-of-trade shocks in a developing economy

This theoretical paper shows that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics and can lessen the gravity of detrimental welfare consequence of international terms-of-trade disturbances in terms of a static two-sector, full-employment general equilibrium model with endogenous labour market distortion. The supply of foreign capital in the economy is a positive function of the return to capital. Subsequently, it has been verbally explained why the main result of the full-employment model would remain valid even in a two-sector specific-factor Harris-Todaro type model with urban unemployment. The analysis leads to a couple of important policies that should be adhered to preserve this in-built system. Finally, it offers three important statistically testable hypotheses which would pave the way for future empirical research in this area.

Drivers of cropland abandonment in mountainous areas: A household decision model on farming scale in Southwest China

Cropland abandonment has emerged as a prevalent phenomenon in the mountainous areas of China. While there is a general understanding that this new trend is driven by the rising opportunity cost of rural labor, rigorous theoretical and empirical analyses are largely absent. This paper first develops a theoretical model to investigate household decisions on farming scale when off-farm labor market is accessible and there is heterogeneity of farmland productivity and distribution. The model is capable of explaining the hidden reasons of cropland abandonment in sloping and agriculturally less-favored locations. The model also unveils the impacts of heterogeneity of household labor on fallow decisions and the efficiency loss due to an imperfect labor market. The model is empirically tested by applying the Probit and Logit estimators to a unique household and land-plot survey dataset which contains 5258 plots of 599 rural households in Chongqing, a provincial level municipality, in Southwest China. The survey shows that more than 30% of the sample plots have been abandoned, mainly since 1992. The econometric results are consistent with our theoretical expectations. This work would help policy-makers and stakeholders to identify areas with a high probability of land abandonment and farming practice which is less sustainable in the mountainous areas.

Skills, Tasks and the Scarcity of Talent in a Global Economy

AbstractThe scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates the role of labor market imperfection in open economies for the usage of talent in the production process of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum of tasks that differ in complexity. Firms hire low‐skilled and high‐skilled workers to perform these tasks. How firms assign workers to tasks depends on factor prices for the two skill types and the productivity advantage of high‐skilled workers in the performance of complex tasks. I study the firms’ assignment problem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding minimum wage for low‐skilled workers. Since the minimum wage lowers the skill premium, it increases the range of tasks performed by high‐skilled workers, which enhances the stock of knowledge within firms to solve complex tasks and reduces the mass of active firms. In a setting with fully flexible wages trade does not affect the firm‐internal assignment of workers to tasks. On the contrary, if low‐skilled wages are fixed by a minimum wage, trade renders high‐skilled workers a scarce resource and reduces the range of tasks performed by this skill type with negative consequences for the human capital stock within firms. In this case, trade leads to higher per‐capita income for both skill types and thus to higher welfare in the open than in the closed economy, whereas – somewhat counter‐intuitive – inequality between the two skill types decreases, as more low‐skilled workers find employment in the production process.

Does Less Wage Compression Lead to Less Training in Germany? An Expansion of Acemoglu and Pischke's Model of Training in Imperfect Labor Markets

We expand Acemoglu and Pischke's seminal model of training in imperfect labor markets by including the system of collective wage bargaining and the components of firms' training costs. Thus we can adapt their model to institutional changes that occurred since the 1990s. The model and the empirical developments we present show that firms compensate lower returns of apprenticeship training by changing training procedures towards more training at the work place and thus by decreasing net training costs. Therefore, more decentralized wage bargaining does not result in a reduction of firms' supply of training positions.

Underinvestment and Unemployment: The Double Hazard in the Euro Area

An alarming legacy of the austerity programs in the euro area is the vast disinvestment that has taken place over the recent years, and especially so in the peripheral economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but also undermines the prospects of a gradual reduction of unemployment and risks further imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model with labour market imperfections, the paper shows that unemployment is a function of capital investment under either CES or Cobb-Douglas production functions. A cross-section estimate for the euro area economies confirms the theoretical findings.

Labor Market Imperfections and the Firm's Wage Setting Policy

Labor Market Imperfections and the Firm's Wage Setting Policy