Market Rigidities Research Articles

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.

The Dilemma of One Currency Area: the Interactive Effects of Currency Overvaluation and Labor Market Rigidity on Export

The Dilemma of One Currency Area: the Interactive Effects of Currency Overvaluation and Labor Market Rigidity on Export

The EPL index, youth unemployment and emigration within the EU

This article focuses on analysing the link between the rigidity of labour markets, the youth unemployment rate and the number of emigrants in the 19-30 age group within the EU in the years 2009-2020. The calculations show a very strong link (0.91-0.95) between the EPL index and the youth unemployment rate during the observed period. The nexus between youth unemployment and youth migration is confirmed as well. The linear dependence fluctuated between 0.61 and 0.65 in the same period. Furthermore, the correlation between total unemployment and total emigration reached up to 0.85 in the post-crisis period. The labour market rigidity and the EPL strictness can have, therefore, several effects; in addition to youth unemployment and youth emigration, total emigration is stimulated as well.

Some Welfare Economics of Working Time

Few skilled workers in the UK have flexible working time – GPs are the exception – most can only choose between unemployment, or full-time work, which has changed little in recent years, while part time work is mainly unskilled. This market rigidity imposes major welfare losses, in contrast to flexibility of worktime for all in the Netherlands, which has the best work-life balance. Stagnating real wages and rising employer market power and inequality follow declining unionisation, but a standard four-day week, tax reform, basic income, and flexibility rights for all could reverse these trends and provide major welfare gains.

Population ageing, labour market rigidity and corporate innovation: Evidence from China

Population ageing leads to labour scarcity and labour market rigidity. Contrary to supply-side economists’ belief that labour market rigidity tends to suppress firm innovation, we provide novel evidence of a positive relationship between population ageing and firm innovation in China. This enhancement effect is greater for firms with higher labour costs, consistent with the argument that labour scarcity encourages labour-saving innovation in response to demographic shifts. In addition, the observed positive effect is particularly pronounced for state-owned enterprises, which are widely acknowledged to be overstaffed with older workers, and firms in industries that pursue Schumpeter-II innovation and engage in more intense research and development. In addition, population ageing helps firms to generate more exploitative (vs. exploratory) innovation. Overall, our findings suggest that firms facing population ageing can adapt their strategies to innovate successfully.

The role of labor market structure and shocks for monetary policy in Kazakhstan

In this paper , we study the role of labor market structure and shocks for monetary policy in Kazakhstan employing a New Keynesian model with labor market rigidities. We estimate the model using Bayesian techniques to identify labor market shocks that are important for monetary policy-making. The estimation results suggest that shocks to the bargaining power of workers explain most of the output and inflation fluctuations. Thus, it should be closely monitored by the central bank. In addition, we examine to what extent different labor market characteristics affect the transmission of monetary policy. The results show that a more flexible wage-setting process improves the transmission mechanism. A monetary policy shock translates faster to inflation. Furthermore, we find that the relevance of other features of the labor market for the transmission of monetary policy shocks is limited.

Parental Caregivers and Household Power Dynamics

Do parental caregivers bear the entire cost of caregiving? Standard cooperative models of the household suggest the welfare burden of care would be distributed across household members (for example, husband and wife). This study develops a simple collective model of intrahousehold bargaining to analyze the time and resource allocation decisions associated with providing unpaid care to an elderly parent. The study argues that if bargaining power is endogenously determined or labor markets are rigid, the welfare cost of caregiving can fall disproportionately on the woman partner, resulting in a “triple burden” of market work, home production, and caregiving, in addition to higher levels of unmet care needs. The study provides a numerical example using cross-country European data to demonstrate how a decrease in an adult daughter's bargaining power relative to her partner can increase her share of the welfare burden and the unmet care needs of her parent. HIGHLIGHTS Intrahousehold bargaining determines the welfare costs of unpaid caregiving. Labor market rigidities have nuanced effects on the division of the welfare burden. Flexible hours/leave policies could provide relief to both caregivers and recipients. Lower wage gaps and shifting social norms may promote a more equitable division of care.

Theory and Practice of Crisis in Political Economy: The Case of the Great Recession in Spain

This paper addresses Marx’s theory of crisis in order to analyze the Great Recession in Spain, a peripheral economy within the Eurozone. It demonstrates that underlying the problem of the “housing bubble” is an incapacity to generate surplus value, which in turn explains certain particularities related to capital composition, productivity, wages, and finance. The article further carries out a critique of both orthodox and heterodox approaches that focus on (1) profit squeeze caused by labor market rigidities, (2) underconsumption due to stagnant wages, and (3) finances, interest rates, and indebtedness JEL classification: B14, E11, E20, E43, J30

Clean energy investment and financial development as determinants of environment and sustainable economic growth: evidence from China.

Environmental sustainability has become one of the most common phrases in discussions about climate change. This study examines the impact of clean energy investment and financial development on environmental sustainability and China's economic growth, using manufacturing value-added and urbanization as moderator variables from 1970 to 2016. We used advanced econometric methodologies for empirical estimations, used structural break unit root tests, fully modified least square, dynamic least square, and robust least square multiple regressions for long-run estimates. Overall, the results determine that clean energy investment is negatively associated with CO2 emissions and ecological footprint while positively associated with China's economic growth. Financial development, manufacturing value-added, and urbanization are positively associated with CO2 emissions, ecological footprint, and China's economic growth. Moreover, clean energy investment improves environmental sustainability at the expense of economic growth. Financial development, manufacturing value-added, and urbanization encourage economic growth at the expense of environmental sustainability. We argued that the local governments play a critical role in lifting the outstanding barriers to cleaner energy investment, addressing disincentives, including pricing carbon dioxide emissions, reforming inefficient nonrenewable fossil fuel subsidies, and addressing regulatory and market rigidities that can undesirably affect the attractiveness of clean energy investment. Policymakers are suggested to encourage green finance strategy for the financial sector to broader sustainable development objectives. At the heart of green manufacturing, industrialization policies are needed to integrate diverse intentions, like inclusive growth, environmental protection, and productivity through a wider range of economic, social, and environmental policy frameworks suitable for decoupling growthfrom social and environmental unsustainability.

Which Integration Policies Work? The Heterogeneous Impact of National Institutions on Immigrants’ Labor Market Attainment in Europe

Can specific policies support the economic integration of immigrants? Despite the crucial importance of this question, existing evidence is inconclusive. Using data from the European Social Survey, we estimate the effects of integration and anti-discrimination policies, alongside social expenditure and labor market regulation, on the labor market performance of 6,176 non-European immigrants across 23 European countries. We make three contributions: 1) we investigate the distinct role of discrete policy areas for labor market integration outcomes, 2) we allow for heterogeneous effects of policies on immigrants with different characteristics, and 3) we examine immigrants’ occupational attainment while accounting for their selection into employment. We find that immigrants’ employment chances are negatively associated with national levels of expenditure on welfare benefits but positively associated with policies facilitating immigrant access to social security. We also find that labor market rigidity is negatively associated with immigrants’ occupational attainment, but we find little evidence that policies aimed at supporting the transferability of immigrants’ qualifications promote their occupational success. Our results strongly suggest that anti-discrimination policies are important for immigrant economic integration. Yet while these policies are associated with greater occupational success for all female immigrants, they seem to be only positively associated with the occupational attainment of higher-skilled and non-Muslim immigrant men. As this article suggests, anti-discrimination policies can foster immigrants’ labor market success, yet these policies currently fail to reach those who face the strongest anti-immigrant sentiments — that is, unskilled male immigrants and Muslim immigrant men.

Mapping Young NEETs Across Europe: Exploring the Institutional Configurations Promoting Youth Disengagement from Education and Employment

Over the past decade, the number of young people neither in employment, education, or training (NEET) has reached a seriously high level in many European countries. Previous studies have illustrated the heterogeneity of this group and that they differ considerably across Europe. However, the reasons of these cross-country differences have hardly been investigated so far. This study explores how the rates of different NEET subgroups are conditioned by various institutional configurations by applying fuzzy-set Quantitative Comparative Analysis for 26 European countries using aggregated EU Labour Force Survey data from 2018. The analysis reveals that institutional causes of being NEET are as diverse as the group itself. Thus, high levels of young NEETs with care responsibilities are found in countries with a lack of family-related services in conjunction with weak formalised long-term care as it is true in mostly Central Eastern European countries. In contrast, high rates of NEETs with a disability are prevalent mainly in Northern European countries where generous and inefficient disability benefit schemes exist that create false incentives to stay away from the labour market. Finally, high proportions of unemployed and discouraged young NEETs are found in those countries hit hardest by the crisis and with high labour market rigidities, low vocational specificity, and a lack of active labour market policies like in the Southern and some Central Eastern European countries. The results illustrate that young people face very different barriers across Europe and that country-specific measures must be taken to reduce the number of NEETs in Europe.

Resource Misallocation in India

At the macro level, productivity is driven by technology and the efficiency of resource allocation, as outcomes of firms’ decision making. The relatively high level of resource misallocation in India’s formal manufacturing sector is well documented. We build on this research to further investigate the drivers of misallocation, exploiting micro-level variation across Indian states. We find that states with less rigid labor markets have lesser misallocation. We also examine the interaction of labor market rigidities with informality which is a key feature of India’s labor markets. Our results suggest that reducing labor market rigidities in states with high informality has a net positive effect on aggregate productivity.

Gender Gaps in the Labour Market and Economic Growth

This paper studies the effects of policies aimed at mitigating discrimination against women in the marketplace on gender gaps in the labour market, unemployment and long‐run growth. The analysis uses a gender‐based overlapping generations model with labour market rigidities. Gender bias in the workplace varies inversely with the presence of skilled women (who operate as agents of change) in employment and has a direct impact on their bargaining power in the family. The model is calibrated for Morocco. Experiments show that although the growth effects of policies aimed at mitigating gender bias in the workplace are significant and are magnified through a stronger presence of skilled women in the labour market, a trade‐off may emerge with respect to female unemployment when they are combined with subsidies to women’s training. To mitigate this trade‐off, anti‐discrimination policies in the marketplace may need to be complemented by across‐the‐board measures aimed at reducing labour costs and raising productivity.

Heterogeneous Responses to the U.S. Narrative Tax Changes: Evidence from the U.S. States

This paper investigates the assumption of homogeneous effects of federal tax changes across the U.S. states and identifies where and why that assumption may not be valid. More specifically, what determines the transmission mechanism of tax shocks at the state level? How vital are states' fiscal structures, financial conditions, labor market rigidities, and industry mix? Do these economic and structural characteristics drive the transmission mechanism of the tax changes at the state level at different horizons? This study employs a panel factor-augmented vector autoregression (FAVAR) technique to answer these issues. The findings show that state economies respond homogeneously in terms of employment and price levels; however, they react heterogeneously in real GDP and personal income growth. In most states, these reactions are statistically significant, and the heterogeneity in the effects of tax cuts is significantly related to the state's fiscal structure, manufacturing and financial composition, and the labor market's rigidity. A cross-state regression analysis shows that states with higher tax elasticity, higher personal income tax, strict labor market regulation, and economic policy uncertainties are relatively less responsive to federal tax changes. In contrast, the magnitude of the response in real GDP, personal income, and employment to tax cuts is relatively higher in states with a larger share of finance, manufacturing, lower tax burdens, and flexible credit markets.

Resource Misallocation in India: The Role of Cross-State Labor Market Reform

At the macro level, productivity is driven by technology and the efficiency of resource allocation, as outcomes of firms’ decision making. The relatively high level of resource misallocation in India’s formal manufacturing sector is well documented. We build on this research to further investigate the drivers of misallocation, exploiting micro-level variation across Indian states. We find that states with less rigid labor markets have lesser misallocation. We also examine the interaction of labor market rigidities with informality which is a key feature of India’s labor markets. Our results suggest that reducing labor market rigidities in states with high informality has a net positive effect on aggregate productivity.

"Fear is the Path to the Dark Side". Electoral Results and the Workplace Safety of Immigrants

Populist parties' propaganda portrays immigrants as a threat to native workers' jobs. When propaganda materializes as an electoral success, it may drive changes in natives' attitudes towards immigrants. As shown experimentally by Bursztyn et al. (2020), electoral results may signal a change in social preferences about immigration and make individuals more likely to express anti-immigrant resentment that they were previously hiding. We employ Italian administrative data to explore whether this mechanism implies actual differences in native and foreign workers' labor market outcomes. We estimate the impact of the electoral results of an Italian populist party, the Lega Nord, on natives and foreigners' workplace injuries and wages. We show that, on average, a 1% increase in the votes for the Lega Nord increases within-job-spell injury rates of foreign workers by 0.9%. Firms below fifteen employees benefiting from less employment protection drive the result. We argue that this is due to a reallocation of hazardous tasks to immigrant workers only in contexts characterized by higher job insecurity. The evidence is weaker for wage reductions, arguably due to labor market rigidity.

Italian Labour Frictions and Wage Rigidities in an Estimated DSGE

This paper investigates how Italian labour market institutions influence business cycle fluctuations. We apply a DSGE model that features Italian labour market rigidities and we estimate the latter on Italian data using Bayesian techniques to assess the effects of demand, supply, and labour market shocks on the macroeconomy, and to measure their significance for economic fluctuations. Our results show: First, technology, time preference and wage bargaining shocks are key drivers of economic fluctuations across horizons. Second, matching efficiency and wage bargaining shocks are significant sources of unemployment and vacancies fluctuations but their role is limited for output fluctuations. Third, labour market relaxation policies have only marginally contributed to the reduction in unemployment. Last, accounting for wage rigidities influences labour market dynamics and helps the model to fit data well. We, therefore, urge policymakers to support additional changes in labour market institutions.

Intra-Industry Trade, Involuntary Unemployment and Macroeconomic Stability

We study the impact of intra-industry trade and capital mobility on steady state welfare and on the stability properties of two countries with identical technologies and preferences. We consider a two-factor overlapping generations model, featuring one-sector of differentiated goods with taste for variety. There is imperfect competition in the output market and increasing returns to scale in production (fixed costs and externalities). In one country there is full employment and saddle path stability in autarky, whereas in the other there are efficiency wages, and the autarkic equilibrium may be locally indeterminate. After opening the borders, the rigid wage country may export indeterminacy to the full employment country, particularly if it is big enough. In contrast, when the full employment country is sufficiently big, local indeterminacy, and therefore expectations driven fluctuations may be eliminated in the world. In any case, stochastic and deterministic fluctuations (associated with local indeterminacy and bifurcations) are possible with smaller externalities, whatever the relative size of the two countries. Steady state welfare improves in the full employment country with free trade and capital mobility, while unemployment increases in the country with labor market rigidities, reducing welfare. We also find that taste for variety (and therefore intra-industry trade), reduces the likelihood of local indeterminacy, but leads to flip bifurcations under more plausible values of the model parameters.

Technology trade with asymmetric tax regimes and heterogeneous labour markets: Implications for macro quantities and asset prices

AbstractThe international diffusion of technology plays a key role in stimulating global growth and explaining co‐movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude towards innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy flexibility and higher labour market rigidity. We develop a two‐country model, in which both countries rely on R&D and adoption, to study the short‐ and long‐run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates future economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, heterogeneity helps to explain the differences in macro quantities and equity returns observed in the international data.

Structural transformation in Egypt, Morocco and Tunisia: Patterns, drivers and constraints

AbstractThis study analyses structural transformation in three Middle East and North Africa (MENA) countries: Tunisia, Morocco and Egypt over a large time period (1960–2010). We examine labour productivity evolution and structural change contribution to productivity growth over different sub‐periods. We analyze the contribution of different economic sectors to aggregate structural change in the three countries. An econometric analysis is also performed to identify the main factors underlying the intensity and the pattern of structural change. Results suggest that the three countries initiated and achieved some progress in structural transformation over the 1970s, 1980s and early 1990s. However, this process has stagnated at low‐income levels and has remained unfinished. Deindustrialization occurred at an early stage of development in the three countries, in contrast to that noticed in developed and emergent countries. The results of the econometric analysis suggest a significant and positive association between investment and structural change as capital accumulation increases the future productive capacity and triggers reallocative efficiency. The human capital quality and availability has a positive and significant impact on structural change. Trade openness is also expected to boost structural transformations. However, labour market rigidity hampers structural transformation.