Labor Market Imperfections Research Articles

The costs of climate policies in a second-best world with labour market imperfections

This article explores the critical role of labour market imperfections in climate stabilization cost formation, using a dynamic recursive energy—economy model that represents a second-best world with market imperfections and short-run adjustment constraints along a long-term growth path. The degree of rigidity of the labour markets is a central parameter, and a systematic sensitivity analysis of the model results confirms this. When labour markets are represented as highly flexible, the model results are in the usual range of the existing literature; that is, less than 2% GDP losses in 2030 for a stabilization target at 550 ppm CO2 equivalent. However, when labour market rigidities are accounted for, mitigation costs increase dramatically. Accompanying measures are identified, namely labour subsidies, which guarantee against the risk of large stabilization costs in the case of high rigidities of the labour markets. This complements the usual view that mitigation is a long-term matter that depends on technology, innovation, investment and behavioural change. The results support the view that mitigation is also a shorter-term issue and a matter of transition with regard to the labour market.

Globalization and Imperfect Labor Market Sorting

This paper focuses on the ability of the labor market to correctly match heterogeneous workers to jobs within a given industry and the role that globalization plays in that process. Using matched worker-firm data from Sweden, we find strong evidence that openness improves the matching between workers and firms in export-oriented industries. This suggests that there may be significant gains from globalization that have not been identified in the past – globalization may improve the efficiency of the matching process in the labor market. On the other hand, we find no evidence that openness affects the degree of matching in import-competing industries. These results remain unchanged after adding controls for technical change at the industry level or measures of domestic anti-competitive regulations and product market competition. In addition, we find no evidence that technical change has any impact on the degree of matching at the industry level. Our results are also robust to alternative measures of the degree of matching, openness, or the trade status of an industry.

Price and Wage Setting in an Integrating Europe: Firm Level Evidence

Europe has witnessed the last decade an accelerated process of economic integration. Trade barriers were removed, the euro was introduced and ten new member states entered the European Union. Economic integration is likely to have an impact on both labor and product markets. Unlike most other papers, that focus on product and labor markets separately, we look at the link between globalization and product and labor market imperfections simultaneously. To this end, we rely on a rich panel of manufacturing firms in Belgium, a small open economy. We find that union bargaining power is higher in sectors characterized by high price cost margins. Moreover, ignoring imperfections on the labor market, leads to an underestimation of product market power. Concerning the influence of globalization, our main findings are that both price cost margins and union bargaining power are typically lower in sectors that are subject higher international competition. This result is especially true for competition from low wage countries.

Do Labor Market Imperfections Increase Trade Protection? A Theoretical Investigation

Abstract Labor market imperfections are commonly believed to be a major reason for imposing trade impediments. In this paper, I introduce labor market rigidities that are prevalent in continental European countries into the well-known protection for sale model proposed by Grossman and Helpman (1994). I show that contrary to commonly held views, imperfections in the labor market do not necessarily increase equilibrium trade protection. A testable equilibrium trade protection equation is also derived. The findings in this paper are hence particularly relevant for empirical tests of trade policy determinants in economies with more regulated labor markets.

FISCAL POLICY AND ECONOMIC GROWTH IN THE IMPERFECT LABOR MARKET

Using a simple overlapping generations model with the growth engine of public capital by incorporating the union wage setting, we examine the effects of fiscal policies on unemployment, economic growth and welfare in the imperfect labor market. We demonstrate that the growth-maximizing tax in the imperfect labor market is larger than that of the perfect labor market. However, as the allocation ratio of public capital increases, the growth-maximizing tax in the imperfect labor market approaches that of the perfect labor market, thus reducing the unemployment rate. The policy implications of the intergenerational welfare aspects are also mentioned.

WHY DO SOME COUNTRIES UNDERTAKE STRUCTURAL REFORMS WHEN OTHERS DO NOT?

It is widely accepted that structural, institutional and labour market reforms are essential for the development of the OECD and emerging market economies; and that argument has been incorporated into official policy in the EU as part of the Lisbon agenda. Yet there is little analysis in the economics literature of how these reforms should work, or of which reforms would be most effective. Similarly, there is no explanation of why policy makers extol the virtues of reform, but often fail to carry them out. Or why some countries embrace reform, but others in similar circumstances do not. To explain these differences we develop a general equilibrium model with imperfect competition, extended to include labour market imperfections and tax distortions. We find that fiscal constraints to be the principal reason that reforms do not get undertaken, though labour market regulation can be a serious complicating factor in certain cases. As a result, the reduction of tax distortions, rather than market or institutional reform, is usually the most effective type of reform. The implication is that we need models that combine different reform instruments and different distortions to analyse this kind of problem.

Outsourcing Cost and Tax Progression Under Nash Wage Bargaining with Flexible Outsourcing

It is analyzed the impacts of outsourcing cost and wage tax progression under labor market imperfections with Nash wage bargaining and flexible outsourcing. With sufficiently strong (weak) labor market imperfection, lower outsourcing cost has a wage-moderating (wage-increasing) effect so that there is a negative (positive) effect on equilibrium unemployment. Higher tax progression, to keep the relative tax burden per worker constant, has a wage moderating and a positive effect on employment and negative effect on outsourcing.

Firm Level Productivity Under Imperfect Competition in Output and Labor Markets

This article examines the role of the interaction between product market and labor market imperfections in determining total factor productivity growth (TFPG). Embedding Dobbelaere and Mairesse’s (2009) generalization of Hall’s (1990) approach, allowing for the possibility that wages are determined according to an efficient bargaining process between employers and employees, we correct estimated TFPG for possible biases arising from labor market imperfections. Our analysis contributes to the literature in a number of ways. First, we propose a new empirical measure of TFPG which takes into account possible biases coming from imperfect competition on both labor and output markets, whereas Dobbelaere and Mairesse (2009) focus on the decomposition of the Solow residual. Second, in contrast to most of the literature following Hall’s approach, we estimate market power including the user cost of capital stock. Third, we measure the sensitivity of TFPG to an alternative specification of competition based on relative profits. Using a large Dutch firm-level panel database over the period 1989-2005, we find that workers’ unions power, and in general rigidities of the labor market, affect firms’ marginal cost, and, consequently, the markups. Moreover, taking into account variable returns to scale and imperfect competition in the output market translate into increased TFPG, while accounting for labor market bargaining power leads to lower TFPG. Next, the investigation of our empirical relationship between the price-cost margin and an alternative specification of imperfect competition of the output market (profit elasticity) as a sensitivity analysis of the TFPG shows that adding more structure to the competition measure does not affect the level of productivity change.

Outsourcing Cost and Tax Progression Under Nash Wage Bargaining with Flexible Outsourcing

It is analyzed the impacts of outsourcing cost and wage tax progression under labor market imperfections with Nash wage bargaining and flexible outsourcing. With sufficiently strong (weak) labor market imperfection, lower outsourcing cost has a wage-moderating (wage-increasing) effect so that there is a negative (positive) effect on equilibrium unemployment. Higher tax progression, to keep the relative tax burden per worker constant, has a wage moderating and a positive effect on employment and negative effect on outsourcing.

Profit Sharing, Wage Formation and Flexible Outsourcing under Labor Market Imperfection

Profit Sharing, Wage Formation and Flexible Outsourcing under Labor Market Imperfection

Profit Sharing, Wage Formation and Flexible Outsourcing Under Labor Market Imperfection

We combine profit sharing and outsourcing, if the wage for worker is decided by a labor union to analyze how does the implementation of profit sharing affect individual effort and the bargained wage and thus outsourcing? We find that profit sharing and the wage level have an individual effort-augmenting effect and therefore increase productivity. We also find that the wage effect of profit sharing is ambiguous. There is a wage decreasing substitution effect, but on the other hand, there is a wage increasing effect via labor demand elasticity so that outsourcing and employment effects are also ambiguous.

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

How Labor Market Rigidities Shape Business Taxation in a Global Economy?

We investigate the impact of trade liberalization upon the taxation of capital within a context of labor market rigidities. Using a model of trade and location, we show that labor market imperfections not only strengthen tax competition but also affect the relationship between trade integration and tax policies. Capital taxation follows a J-shaped relationship with trade costs when labor markets are flexible, whereas it may increase with falling trade costs in the presence of trade unions acting as Stackelberg leaders or playing simultaneously with governments. In addition, we analyze the outcome which arises from differences between the various countries’ labor market institutions. Trade liberalization reduces the international differences in wage and capital taxation, making the unionized country more attractive.

Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter

This paper re-examines the effects of population aging and pension reforms in an OLG model with labor market frictions. The most important feature brought about by labor market frictions is the connection between the interest rate and the unemployment rate. Exogenous shocks (such as aging) leading to lower interest rates also imply lower equilibrium unemployment rates, because lower capital costs stimulate labor demand and induce firms to advertize more vacancies. These effects may be reinforced by increases in the participation rate of older workers, induced by the higher wage rates and the larger probability of finding a job. These results imply that neglecting labor market frictions and employment rate changes may seriously bias the evaluation of pension reforms when they have an impact on the equilibrium interest rate.

PUBLIC DEBT AND PUBLIC INVESTMENT IN AN ENDOGENOUS GROWTH MODEL WITH REAL WAGE RIGIDITIES

We present an endogenous growth model with public capital, public debt and real wage rigidities due to labor market imperfections. Assuming that the primary surplus relative to gross domestic produce (GDP) is a positive function of the debt to GDP ratio, we study growth and employment effects of deficit-financed public investment using simulations as well as how fiscal policy affects stability of the economy. Further, we contrast the growth rate and the unemployment rate in the deficit scenario with that of the balanced budget scenario. Finally, we compare our results with those obtained in case of flexible wages and full employment.

Equilibrium unemployment with outsourcing and wage solidarity under labour market imperfections

We evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high- and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will dampen this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.

Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis

AbstractThis paper analyses the impact of corporate taxes on structural unemployment, using an applied general equilibrium model for the European Union. We find that the unemployment and welfare effects of corporate taxes differ considerably among European countries. The magnitude of these effects rises in particular in the broadness of the corporate tax base of a country, and the strength of international spillover effects through foreign direct investment. The effect on unemployment is smaller if the substitution elasticity between labour and capital is large, if international spillover effects operate primarily via multinational profit shifting, and with small labour market imperfections. Although the effect of corporate taxes on unemployment may be smaller than the effect of labour and value‐added taxes (e.g. under relatively strong real wage resistance), the welfare costs of corporate taxation are typically larger for most European countries under plausible parameters, especially under strong international spillovers.

Book Review: Labor Economics: The Economics of Imperfect Labor Markets

Book Review: Labor Economics: The Economics of Imperfect Labor Markets

The rise of obesity in Europe: an economic perspective

Obesity in Europe is rising. This paper investigates the economic rationales for public intervention to control obesity. We present new empirical evidence showing that family background is related to obesity among young European adults. This evidence provides a strong basis for intervention on equity grounds, particularly targeted towards children. The case for intervention on efficiency grounds is less clear-cut and in most cases the evidence is relatively weak. We find insufficient evidence that information deficiencies are important, as the majority of Europeans appear to be aware of the bad consequences of obesity on health. We also find that the potential health insurance externality – non-obese effectively subsidizing obese individuals – is small. In support of policy intervention, we show that there are product and labour market imperfections. Obese employees earn less than the non-obese. We also find that there is a remarkably high proportion of individuals with self-control problems, who fail to stick to their self-declared weight-related plans. Regulations that affect fast food advertisements and the location and access to fast food vending machines and establishments may help these individuals in controlling their weight. — Giorgio Brunello, Pierre-Carl Michaud and Anna Sanz-de-Galdeano

Interaction between product market and labour market power: evidence from France, Belgium and Chile

This article jointly estimates price-cost mark-ups and union bargaining power of manufacturing firms in France, Belgium and Chile. Our GMM results provide strong evidence of price-cost mark-ups being underestimated when labour market imperfections are ignored, corresponding to the omission of the part of product rents captured by the workers.