Market Rigidities Research Articles

Unintended workplace safety consequences of minimum wages

We investigate the unintended impact of minimum wage increases on workplace safety. Using establishment-level data from the United States and a cohort-based stacked difference-in-differences design, we find that large increases in minimum wages have significant adverse effects on workplace safety. Our findings indicate that, on average, a large minimum wage increase results in a 4.6 percent increase in the total case rate. Event study estimates show that this adverse effect persists in the medium run. Furthermore, we find a more salient effect for firms more likely to be financially constrained or subject to a higher labor market rigidity in firing workers. We provide suggestive evidence that small minimum wage increases might reduce injury rates, highlighting the potential heterogeneity in the impact of minimum wage changes. We do not find evidence that capital-labor substitution could be behind the findings.

Trade, labor market rigidity, and distributive share in a generalized oligopolistic equilibrium model

AbstractThis paper applies a generalized oligopolistic equilibrium model with labor rigidity under strategic competition between heterogeneous firms, explaining the trade between two similar countries for the declining wage and labor share, the common experiences of many countries worldwide. The specialization effect for the labor movement from a high to less labor‐intensive sector arising from the heterogeneous productivity distribution of firms between trading partners dampens the wage more than the joint effect of market size and competition working favorably on it. Despite the wage drop, the trade ambiguously affects employment but unambiguously reduces their distributive share.

Adolescent anterior cruciate ligament reconstruction: a decade of rising surgical cost.

The number of anterior cruciate ligament reconstruction (ACL-R) surgeries for adolescent patients has been increasing, and so are the costs for medical care services and the general cost of living. We proposed a novel economic model assessing the cost associated with adolescent ACL-R over time and how this compared with price measures in the US economy. Economic analysis. ACL-R surgeries performed from 2010 to 2022 in a single Level I trauma center were included. The trend of the total charge, charge of anesthesia, and operating room (OR) charge were normalized to 2010 (base year) and compared with the inflation in hospital services, medical care services, and the US economy measured by the Consumer Price Index (CPI). The actual reimbursements-to-charges percentage from the payers was analyzed. Comparing growth rates rather than dollar values circumvented any problematic direct-dollar comparisons across measures. Analyzing 459 qualified ACL-R cases in patients whose ages ranged from 12 to 18 years, the overall total median charge increased 70%, whereas the General CPI, Medical CPI, and Hospital CPI increased 35%, 41%, and 64%, respectively. The anesthesia and OR charges increased 52% and 92%, respectively. The annual reimbursements-to-charges percentage hovered steadily beneath 50%. All inflation measures rose sharply after 2019. The rising cost of adolescent ACL-R has been outpacing the inflation in the cost of medical services and the general economy in the US. The COVID-19 pandemic and market rigidity in medical services may have impacted these trends. Optimizing OR time usage may mitigate the rising cost.

Resilience of Saudi Arabia’s Economy to Oil Shocks: Effects of Economic Reforms

We assess the extent to which the implementation of Vision 2030 policies enhances the Saudi economy’s resilience to oil shocks. Using a dynamic stochastic general equilibrium model that captures the country’s economic diversification policies, we build a resilience index based on impulse responses to shocks. The policies considered have two opposite effects: reforming domestic energy prices, deploying renewables and introducing a value-added tax increase the volatility of macroeconomic aggregates, whereas economic diversification policies stabilize the economy. Overall, with Vision 2030 the economy’s resilience to oil price shocks increases by 10 to 60 percent, depending on how labor market rigidities and the recycling of fiscal revenues are accounted for. Oil prices remain the main driver of macroeconomic fluctuations. Our analysis shows that an oil-exporting country should design policy packages that balance structural reforms with economic diversification, in order to shield its economy against oil shocks while generating long-term welfare gains. JEL Classification: D58, E13, E32, E37, E65, H30, H50, Q43

Flexible labor, innovation regimes and the erosion of the Japanese model: Evidence from the Basic Survey on Wage Structure

Due to labor market reforms around 2003–4, Japan has a growing group of ‘non-regular’ workers who are easy to fire, and have poor carrier perspectives. This marks a break with the traditional Japanese model of life-time employment that allowed for intensive in-company training and commitment of personnel. Drawing from a national wage structure survey, we find indications that employment of non-regular workers has a negative impact on productivity (proxied by wages), this negative impact being largest under innovation regimes that require a high cumulativeness of knowledge. Our findings are consistent with neo-Schumpeterian research in Europe which concluded that certain labor market rigidities, while being undesirable from a neoclassical perspective, can be useful to innovation. Our paper confirms the impression from earlier research that structural reforms of labor markets along supply-side lines are likely to be one of the reasons for a substantial decline of productivity growth in major OECD countries since about 2004/05.

The impact of non-financial disclosure on labor investment: International evidence

This study examines the impact of non-financial disclosure (NFD) on firms' labor investment efficiency. We analyze a broad sample of firms located across 44 countries and the period 2006–2019. Using regression analysis, the association between abnormal employment growth and environmental, social and governance (ESG) disclosure volume is evaluated. Preliminary evidence reveals that this association is, in general, negative, with NFD exerting a positive influence on labor investment efficiency. Importantly, we also find that the country's institutional and legal background modulates the association, in that the link is markedly stronger in countries with higher-quality investor protection, rule of law and anti-self-dealing devices. Finally, we document stronger effects of ESG disclosure in countries featuring higher labor market rigidities and unionization rates, even after controlling for the country institutional and legal background.

When structural reforms of labor markets harm productivity. Evidence from the German IAB panel

Abstract We find firm-level evidence that removing labor market rigidities can harm productivity growth. This holds, in particular, in industries with a high ‘cumulativeness’ of knowledge, i.e., when accumulation of worker-embodied (and often ‘tacit’) knowledge from experience is important for innovative competencies. We conclude that there is a trade-off between the efficient allocation of scarce resources in a static neoclassical perspective and dynamic Schumpeterian efficiency, the latter requiring rigidities in labor markets that are valuable for innovation.

Labour market rigidity and firm innovation

AbstractThis paper examines the impact of pro‐worker interference on wage contracts and innovation incentives in the labour market. Using a general equilibrium model, we find that excessive interference affects contingent wage contracts in innovator start‐ups and tech‐intensive firms, especially for complex innovation. When worker dismissal is restricted, high wages may not effectively drive innovation. Moreover, without an efficient intellectual property market, excessive labour market interference can lead to innovation stagnation. Our findings highlight the importance of balancing labour market regulations to foster innovation and ensure its continued growth.

The Smart Power of Abenomics: Shadows of Japanization and Long-term Challenges

This article discusses the main tasks of the smart power of Abenomics as the basis of the anti-crisis economic policy of modern Japan. The idea is argued that the Abe government proposed a program known as the “Three Arrows of Abenomics”, the implementation of which helped Japan get out of deflation, but the economic growth potential remained extremely low. This economic policy was unique in that the whole range of its measures was adapted to the specifics of the Japanese economy or Japanization. The experience of modern Japan in the fight against economic stagnation is undoubtedly very valuable for many countries. Having studied the main stages of economic policy, as well as the difficulties faced by Japan during its implementation, each country will develop its own strategy to combat the economic crisis and stagnation, adapted to the characteristics of each of the states. This article analyzes key aspects of the Abenomics economic reform package. In addition to characterizing individual measures, it focuses on the analysis of outcomes such as deflation, weak economic growth or labor market rigidity. The characteristic features of the so-called new arrows of Abenomics are identified and described, which respond to the successes achieved, as well as to the new challenges of the Japanese economy.

Experienced versus decision utility: large‐scale comparison for income–leisure preferences*

AbstractSubjective well‐being (SWB) data are increasingly used to perform welfare analysis. Interpreted as “experienced utility”, it has recently been compared to “decision utility” using small‐scale experiments most often based on stated preferences. We transpose this comparison to the framework of non‐experimental and large‐scale data commonly used for policy analysis, focusing on the income–leisure domain where redistributive policies operate. Using the British Household Panel Survey, we suggest a “deviation” measure, which is simply the difference between actual working hours and SWB‐maximizing hours. We show that about three‐quarters of individuals make decisions that are not inconsistent with maximizing their SWB. We discuss the potential channels that explain the lack of optimization when deviations are significantly large. We find proxies for a number of individual and external constraints, and show that constraints alone can explain more than half of the deviations. In our context, deviations partly reflect the inability of the revealed preference approach to account for labor market rigidities, so the actual and SWB‐maximizing hours should be used in a complementary manner. The suggested approach based on our deviation metric could help identify labor market frictions.

Labour market rigidity and total factor productivity: a re-examination of the evidence from India

ABSTRACT The existing empirical studies concerning labour market rigidity associated with the labour laws in India suggest an adverse impact of rigidity on total factor productivity (TFP). In this paper, we improve upon both the measurement of spatiotemporal variation in labour market flexibility and plant-level TFP from production function estimates in the presence of institutional rigidity in labour inputs adjustment due to job security legislation based on the recent advancement in the literature. We use an unbalanced panel of manufacturing plants from the Annual Survey of Industries panel data from 1999–2000 to 2016–17 to analyse the relationship between labour market rigidity/flexibility and TFP. We find that establishments that fall under the purview of job security legislation have higher productivity than those outside the ambit of job security legislation. The results suggest that rigidity associated with job security provisions does not harm TFP, and higher flexibility is negatively associated with TFP. However, we find considerable heterogeneity in the flexibility–TFP relationship across various industry groups. The heterogeneity in the flexibility–TFP relationship suggests that flexibility-inducing labour policy may improve TFP in some industries and, at the same time, decrease it in others.

LABOR MARKET RIGIDITIES AND OKUN'S LAW ASYMMETRIES FOR LATIN AMERICA DURING THE PERIOD 2000-2018

This paper evaluates the relationship between market rigidity and Okun's law asymmetry, using a sample of six Latin American countries from 2000 to 2018. After econometric processing of the variables, the annual data show that the potential GDP of the six countries is negatively correlated with the unemployment rate. Latin American hiring regulations and the relationship between minimum wage and unemployment are opposite, and there is no explanation on how the significance of unemployment affects these variables, and there is a positive relationship with centralized collective bargaining

Determinants of macroeconomic resilience in the euro area: An empirical assessment of national policy levers

This paper evaluates which structural characteristics matter for macroeconomic resilience, in particular regarding the capacity to absorb and recover from common shocks across euro area Member States over the period from 1998 to 2018. Applying a panel regression analysis and Bayesian model averaging, the paper aims to identify a set of factors as diverse and specific as possible in order to guide future policy actions. These country-specific factors relate to the macroeconomic conditions, the functioning of product, labour and financial markets, institutional quality and to deeply entrenched structural factors. The empirical analysis suggests that the factors conditioning the shock absorption across euro area Member States largely differ from those facilitating recovery in the face of a common shock. More specifically, labour market features play an important role in shock absorption with higher levels of labour market rigidity dampening the shock absorption capacity most. The recovery capacity is affected by a broader set of factors, especially those that hinder the reallocation of labour as well as of the production of goods and services. While high public debt seems to hinder shock absorption capacity, high private debt weakens the recovery capacity. Some factors such as high economic openness have a negative impact on the absorption capacity in case of a common shock as it also affects trading partners, while having a positive impact on the recovery capacity. The results also suggest that degrees of macroeconomic resilience differ across the euro area and well-calibrated reforms are needed to address the nexus of country-specific challenges.

Labour market rigidity and trade margins

AbstractCountries differ, sometimes significantly, regarding their basic labour market structure. Despite the prevalence of theoretical literature, empirical studies examining the impact of labour market rigidity (LMR) on trade is sparse. Existing empirical studies have been limited to aggregate trade flows with cross‐sectional estimations; a limited set of countries (e.g. OECD or Latin America) or to the period after 1990. We utilise a gravity model of trade to examine the impact of LMR on exports for 145 countries between 1964 and 2004. We utilise dis‐aggregated product‐level trade data and decompose total exports into the extensive and the intensive margin to examine this relationship. We also utilise total aggregate international trade relative to domestic sales, which allows for the identification of LMR‐trade relationship, even in the presence of multilateral trade resistance controls. Finally, we estimate the effect of LMR on exports (and the margins) by focusing on a sample of European OECD countries via the difference‐in‐differences estimation. In all cases, we find that a rigid LMR reduces total exports, and this decrease is driven primarily by the intensive margin. Our findings are relevant as recent studies have found the intensive margin to be more important for long‐run export growth and especially for developing countries.

‘Bread for all, and Roses, too’: satisfaction with job stability and pay among young Italian workers

ABSTRACT Over the last 20 years, the Italian labour market has seen increasing unemployment, job contract instability and lower wages as a result of the global economic crisis and the policies fielded by successive governments to reduce labour market rigidities, regarded as the primary cause of high unemployment, for young people and women in particular. This paper analyses young workers’ job satisfaction. Job satisfaction is relevant for workers’ well-being, but it has also been shown to affect workers’ productivity and hence firms’ performance. We analyse overall job satisfaction and satisfaction for two job dimensions, stability and pay. We contribute to the existing literature by investigating whether job stability can compensate for a lower wage and whether the opposite is true, i.e. if a higher pay can compensate for job instability. Our findings show that overall job satisfaction is affected only by pay level. However, when we consider satisfaction with stability and pay satisfaction jointly, the type of contract seems to be more relevant than the pay in determining the probability of being either satisfied or dissatisfied with both dimensions. Therefore, if different dimensions of satisfaction are considered, both stability and pay are relevant, and there appears to be no compensating effect.

Labour market rigidity and expansionary austerity

This study provides new evidence on how labour market rigidities affect the transmission of fiscal consolidations using a sample of 17 OECD countries. Owing to a novel empirical approach, the outcomes of consolidations are modelled as a function of employment and wage rigidities. The evidence confirms that tax-based consolidations are distortionary, while expenditure-based consolidations have wealth effects. These effects are then magnified by flexible employment and rigid wages, while they are moderated by rigid employment and flexible wages. This indicates that labour market conditions influence how fiscal consolidation is propagated in the economy by affecting both the magnitude and the transmission channels of consolidation plans. This result has crucial policy implications and suggests that the design of consolidation plans should account for the labour market structure.

An Inconvenient Truth: Welfare Losses From Asymmetric Reductions in Transportation Costs

Recent empirical studies find that the magnitudes of reductions in bilateral shipping costs are asymmetric within country pairs. Motivated by these findings, I study the welfare effects of asymmetric reductions in transportation costs in Helpman and Itskhoki's [(2010). Labour market rigidities, trade and unemployment. Review of Economic Studies, 77(3), 1100–1137] model of international trade with heterogeneous firms and frictional labor markets. I show that sufficiently asymmetric reductions in bilateral transportation costs result in welfare losses in the importing country, while a uniform reduction in the bilateral transportation costs of both imports and exports always benefits both countries. This paper raises a cautionary note that the phrase ‘welfare gains from trade liberalization’ implicitly assumes an ‘approximately equal’ reduction in transportation costs.

Informalization of the formal sector: Evidence from India's manufacturing industries

Abstract The employment structure of India's formal manufacturing sector has undergone substantial changes since the early 2000s with a steep rise in the use of contract workers in place of directly hired workers. Much of the existing literature has attributed the widespread use of contract labour to India's rigid employment protection legislation. The resulting informalisation of the workforce in the organised sector raises concerns about the sustainability of employment growth. Using a 14-year plant-level panel data from the Annual Survey of Industries, we find that in addition to labour market rigidities and the existence of a wage differential between contract and directly hired workers, plants in the organised manufacturing sector have another important incentive to hire contract workers. Plants appear to be using contract workers to their strategic advantage against the directly hired workers to keep their bargaining power and wage demand in check. Importantly, the strength of this bargaining channel varies across plants depending on their capital intensity of production, size and existing contract worker intensity.

Labor market rigidities and misallocation: Evidence from a natural experiment

This paper estimates the impact of labor market rigidities on labor misallocation. To this end, we use a recent policy change in Belgium, leading to an increase in employment protection for blue-collar workers and a decrease in employment protection for white-collar workers. The wedge between marginal product and marginal cost - the gap - is used as a measure for misallocation. Using a rich data set of the universe of Belgian firms, evidence shows that a firm with 90% blue-collar workers experienced after the policy change an increase in the gap of 3300 euro relative to a firm with 10% of blue-collar workers.

Structural time series models and synthetic controls—assessing the impact of the euro adoption

So far, empirical research on an ex-post benchmark of the euro adoption has relied on the synthetic control method by Abadie & Gardeazabal (Am Econ Rev 93:112-132, 2003) and Abadie et al. (J Am Stat Assoc 105:493-505, 2010, Am J Polit Sci, 59:495-510, 2015). However, the evidence obtained with this method is not overly consistent, leading to the conclusion that the method is not too robust to different settings of the adjustment screws. Using a new method developed by Harvey & Thiele (J Appl Econ 36:71–85, 2021) based on structural time series models, I find that France and Italy are clear losers from the euro while there are no real winners until 2019. Spain, Netherlands, Greece gain in the period before the financial crisis, but afterwards they lose. In fact, only the German economy is robust to the two crises but it loses until 2008. Relating the theories of optimum currency areas to the estimated gaps of the euro adopters from their synthetic controls, I find that openness, real convergence, and net migration are the main drivers of gains from a euro adoption, while the main drivers of losses are low levels of competitiveness, fiscal instability and labour market rigidity. Examining the crisis channels of the financial and euro crisis shows that fiscal instability, labour market rigidity and also business cycle synchronization cause large losses during the crises. Net migration helps to dampen these shocks. While openness is beneficial during the pre-crises period, it cannot help dampen the shock of the crises.