Response Of Wages Research Articles

The political economy of inflation management: the case of Greece

This article explores how the impact of the 2022–2023 inflationary episode was managed in Greece, and explains how labour market governance framed public policy responses. Greece resembles other southern European countries in the chronic weakness of its institutional preconditions for managing emerging inflationary pressures in a coordinated manner. Greece is also different, however, in that the previous two economic shocks had left a legacy of drastically diminished collective bargaining, financially vulnerable households and a public debt-to-GDP ratio close to 200 per cent. We show that, in a context of weakened trade unions and collective bargaining institutions, the response of wages to inflation was anaemic, while profits grew strongly, especially in oligopolistic product markets. We also discuss how, in order to ease the cost-of-living crisis, the government resorted mainly to untargeted support measures with a regressive distributional impact. We conclude by reflecting on what our findings imply for Greece’s quest for a more sustainable and more inclusive growth model.

Commodity prices and production networks in small open economies

We study the role of domestic production networks in the transmission of commodity price fluctuations in small open economies. First, we present a tractable model of a small open economy's production network to explain sectoral propagation patterns. We demonstrate that the domestic production network is crucial in shaping the propagation of commodity prices. Using a panel of 31 sectors across 9 small open economies, we empirically confirm the model's predictions. Next, we construct a dynamic model of a small open economy featuring a production network to study the macroeconomic importance of the network structure in shaping both aggregate and sectoral responses to commodity price shocks. We show that: (i) the network-adjusted labor share of the commodity sector, rather than the sector's size, is key to understanding the real wage's response to commodity price fluctuations; and (ii) non-unitary elasticities of substitution in production are crucial for understanding the cross-sectional implications of these fluctuations.

Wage bargaining structure and political budget cycles: A policy game approach

Utilizing a panel dataset from OECD countries, this study unveils new evidence suggesting that the centralization of wage bargaining plays a significant role in mitigating Political Budget Cycles. To explain this empirical finding, the paper introduces a political economy model based on a policy game framework, encompassing three key agents: (i) an opportunistic government that decides on the level of budget deficits with the objective of enhancing its reelection prospects, (ii) workers/voters who decide on their sectoral affiliations, and (iii) unions that independently negotiate wages with firms. In this model, the opportunistic government has an incentive to run a budget deficit to favor the median voter, who is affiliated with non-tradable sectors. The mechanism emerges from the impact of debt-financed public spending on relative prices, and consequently, on relative wages between non-tradable and tradable sectors. Wage centralization mitigates the political incentive of opportunistic governments by attenuating the responsiveness of sectoral wages to sectoral prices, thereby pushing down budget deficits towards a socially more optimal level.

Learning about labor markets

We study a general equilibrium model of the labor market in which agents slowly learn about their suitability for jobs. Our model reproduces desirable features of the data, many of which standard models fail to replicate. We explore how, in such an environment, asymmetric information can lead to substantial misallocation. We calibrate our model to US data and quantify the welfare loss arising from misallocation due to informational frictions. The tractability of the model allows us to explore the responsiveness of wages and employment to an aggregate shock. We find that wage rigidity arises endogenously because of protracted learning, and in line with the data, the model is able to generate a larger and more persistent employment response.

Addressing Chronic Conditions and Social Determinants of Health During the COVID-19 Pandemic.

Chronic conditions or diseases are defined as persistent conditions lasting ≥ 1year requiring either ongoing medical attention or limiting daily living or both (Agency for Healthcare Research and Quality (AHRQ) in Programs: SHARE approach workshop, Agency for Healthcare Research and Quality (AHRQ) (2016) Programs: SHARE approach workshop 2016. https://www.ahrq.gov/professionals/education/curriculum-tools/shareddecisionmaking/workshop/index.html . Accessed 20 Jan 2017). Physical chronic conditions, including diabetes, hypertension, heart disease, arthritis, and stroke, are prevalent, especially in the older population. Over 90% of older adults have at least 1 and 77% have ≥ 2 chronic conditions (American Diabetes Association (ADA) in Statistics about diabetes, American Diabetes Association (ADA) (2023) Statistics about diabetes. https://diabetes.org/about-us/statistics/about-diabetes . Accessed 20 Apr 2023). Chronic conditions account for $4.1 trillion of the nation's annual healthcare expenditure (Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion in Health and economic costs of chronic conditions, Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion. Health and Economic Costs of Chronic Conditions (2022). https://www.cdc.gov/chronicdisease/about/costs/index.htm . Accessed 7 Jan 2023). There are marked disparities based on age, color, and income, with older people, people of color, and lower-income people having higher treatment costs or even lost wages in response to having chronic conditions. Chronic conditions are the on-the-top leading causes for death with diabetes being the top 7th in the USA in 2019 (Ferguson in Metabolic Syndrome Related Dis, Ferguson et al., Metab Syndr Relat Disord 21:177-187, 2023).

An Assessment of the Relevance of the Mincerian Equation: The Case of Mauritius

This paper assesses the relevance of the Mincerian Equation in Mauritius. Using CMPHS data, the basic equation is augmented to cater for wage responsiveness to changes across different schooling levels. However, the use of the standard linear regression method does not take into consideration the endogeneity of the variable years of schooling and sample selection bias. The IV2SLS Method is adopted, using region as an instrument. The Heckit model is further adopted to address the problem of sample selection bias. This study also employs pseudo panel models as an alternative to IV2SLS as a weak instrument may significantly impact results.

Industrial carbon capture utilisation and storage in the UK: The importance of wage responses in conditioning the outcomes of a new UK CO2 transport and storage industry emerging in a labour supply constrained economy

Carbon capture usage and storage (CCUS) is emerging as an important solution in delivering deep emissions reductions in energy-intensive industries, enabling hydrogen production, and possibly directly capturing existing carbon dioxide (CO2) from the atmosphere. The potential for associated new industry activity – for example in CO2 Transport and Storage (T&S) – could also be important in transitioning economies with legacy investment in oil and gas extraction. This paper addresses the question of how introducing a nascent T&S industry may impact the wider UK economy in the presence of persisting national labour supply constraints. It does so by refining a multi-sector economy-wide computable general equilibrium (CGE) model of the UK to run scenarios focussed on the emergence of a nascent sector, involving identification of benchmark activity – here, the existing oil and gas industry – where that nascent sector is not currently represented in national accounting data. Crucially, the CGE model embeds a theoretically and empirically tested wage bargaining function to consider how cost and price pressures triggered will condition dynamic outcomes for producers, consumers and government budgets. Results suggest that emergence of a new T&S industry is likely to deliver sustained net gains in UK employment and GDP. However, maximising T&S-linked jobs gains while minimising displacement of employment and price pressures elsewhere in the economy requires policy action to alleviate labour supply and skills constraints. This reinforces policy and industry recommendations around the need for net zero workforce planning and attention to the potential fiscal implications of taking action, or not/in different timeframes.

How Responsive Are Wages to Firm-Specific Changes in Labour Demand? Evidence from Idiosyncratic Export Demand Shocks

Abstract Do firms adjust wages in response to changes in their own demand level or to changes in competitive pressure from rival employers? We study how exporters adjust wages in response to unexpected product demand shocks during the 2008–9 Great Recession. Using rich data on Portuguese firms’ pre-recession export shipments, we measure firm-level shocks to export demand during the Recession. We show that shocks constructed at the firm level are not necessarily firm-specific and can be decomposed into a common component affecting all producers in a product market and an idiosyncratic component affecting individual firms within markets based on the locations of their pre-recession customers. We demonstrate that while both components impact firms’ output and their workers’ wages, the common component spills over from firms to their labour market rivals, whereas the idiosyncratic component does not. We find that 10–15% of firms’ idiosyncratic demand passes through to their employees’ wage growth with no effect on retention rates, implying significant dependence of wages on noncompetitive quasi-rents. Moreover, we find that wages respond primarily to shifts in internal labour demand when labour markets are thin, but they respond more to competition from other employers when labour markets are fluid. These results indicate that employers’ ability to set wages hinges on the underlying competitiveness of the labour market.

Wage response to corporate income taxes: A meta‐regression analysis

AbstractThe wage elasticity to corporate income tax (CIT) is an essential parameter for assessing tax policy reforms. This paper applies meta‐regression analysis to quantitatively review the growing empirical tax incidence literature that indicates a substantial shift of the tax burden onto employees. While most studies report a large wage‐reducing effect of the CIT, our findings suggest that estimates with positive values are published less often than they should. After accounting for the bias, we find no significant average association between wage rates and corporate taxation. We document that the tax variable, econometric method, type of tax variation, and underlying time and country coverage of studies drive the heterogeneity among reported effects. The implied best‐practice estimates suggest that the tax elasticity of wages is systematically larger for emerging countries and smaller when tax changes at the subnational level are exploited.

Revisiting Real Wage Rigidity

AbstractIn this paper, we provide empirical evidence that real wage rigidity is not a major cause of unemployment volatility. We argue that there is a disconnect between the theoretical and empirical literatures on this topic. While theoretical studies define real wage rigidity as the response of wages to changes in unemployment following productivity shocks, the empirical literature measures real wage rigidity as the estimated semi‐elasticity of wages with respect to unemployment, averaged over all shocks. We show that averaging over shocks gives a biased measure of real wage rigidity, as the impact of other shocks confounds the response to productivity shocks. Our results indicate that the estimated semi‐elasticity with respect to productivity shocks is twice as large as the estimated semi‐elasticity averaged over all shocks. This implies that one cannot attribute unemployment volatility to real wage rigidity.

The macroeconomic consequences of subsistence self-employment

We evaluate the aggregate effects of expansions of credit supply in environments where subsistence self-employment is prevalent. We extend a standard macro development model to include unemployment risk, which becomes a key driver of selection into self-employment. The model is consistent with the joint distribution of earnings and occupations, the reaction of wages to labor demand shocks, and the small effects of expansions in the supply of microloans on the earnings of the self-employed. We find that the elasticity of aggregate output to expansions in credit supply is proportional to the elasticity of individual earnings. This proportionality arises due to the muted effects of wages in general equilibrium in the presence of subsistence self-employment, and is not present in models without subsistence self-employment due to a larger wage response, and a larger crowding-out of private savings in response to a higher availability of credit.

Monetary transmission with income risk*

AbstractIn periods of distress, observed and perceived income risk tends to rise. Does this heightened income risk affect monetary transmission? This paper first shows that in partial equilibrium, heightened income risk dampens the substitution effect of interest rate changes but amplifies the indirect income effect of wage changes. The effects are sizable in partial equilibrium. An increase in income risk consistent with heightened risk during recessions affects interest rate and wage responses by around one‐third. However, because income risk dampens the effects of interest rate changes but amplifies the effects of wage changes, its effect is weaker in general equilibrium, dampening monetary transmissions to consumption by around 11 percent.

Реакция заработной платы на изменение потребительских цен в условиях внешних шоков: дальневосточные регионы

External macroeconomic shocks have changed not only the national and regional labor markets themselves, but also the very ability of these markets to change in response to important changes in the parameters of the external environment. Therefore, wage flexibility as a reaction to external shocks is one of the most important subjects of interest for researchers. The study assessed the flexibility of nominal wages in response to changes in the consumer price index in the labor markets of the Far Eastern Federal District (Far Eastern Federal District) in the period from January 2010 to August 2023 with a detailed description of the periods of the most important external shocks. A comparative spatial and temporal analysis of the flexibility of the Far Eastern labor markets allowed us to justify their transition from a regime of price adaptation to a regime of limited supply of labor resources during the «pandemic» crisis of 2020–2021. A long-term trend of flexibility loss by the regional labor markets of the Far Eastern Federal District has been revealed, which was especially clearly manifested during the second sanctions shock of 2022–2023

The Response of Wages to Rejected Offers

The Response of Wages to Rejected Offers

Anticipated productivity and the labor market

We identify the main shock driving fluctuations in long‐horizon productivity expectations, consistent with theories of TFP news. The identified shock induces strong comovement patterns in output, consumption, investment, employment, and stock prices even though TFP does not change significantly for more than 2 years. A labor search model in which wages are determined by a cash‐flow sharing rule, rather than the present value of match surplus, matches the observed responses to the news shock. The model also matches the empirical patterns of vacancies, labor force participation, hours, and job‐finding rates. The proposed wage rule is consistent with empirical responses of wages to both anticipated and unanticipated productivity changes.

Searching for Job Security and the Consequences of Job Loss

Job loss comes with large present value earnings losses which elude workhorse models of unemployment and labor market policy. I propose a parsimonious model of a frictional labor market in which jobs differ in terms of unemployment risk and workers search off‐ and on‐the‐job. This gives rise to a job ladder with slippery bottom rungs where unemployment spells beget unemployment spells. I allow for human capital to respond to time spent out of work and estimate the framework on German Social Security data. The model captures the joint response of wages, employment, and unemployment risk to job loss which I measure empirically. The key driver of the “unemployment scar” is the loss in job security and its interaction with the evolution of human capital and, in particular, the search for better employment.

Labor market concentration and heterogeneous effects on wages: Evidence from Japan

This study provides empirical evidence of the impact of labor market concentration on wages. We find that (1) wages are suppressed in more concentrated labor markets, (2) labor rigidity is associated with wage responsiveness to labor market concentration, (3) the impact of labor market concentration on wages is smaller for firms with more competitive downstream product markets, and (4) greater job opportunities outside the manufacturing sector weaken the relationship between concentration and wages. In sum, our findings indicate that labor rigidity and the degree of competition in downstream product markets, as well as outside options, affect the relationship between market concentration and wages.

Minimum Wage Effects on Reservation Wages

Reservation wages are part of the transmission mechanism between minimum wages and unemployment via the labour force participation decision. The limited available empirical evidence on the relationship between reservation wages and legal minimum wages suggest that individuals use minimum wages as benchmarks against which their reservation wages are set. This has a profound behavioural effect that may encourage individuals to either enter the labour force or price themselves out of potential employment. We employ a fuzzy regression discontinuity design to explore the influence of minimum wages on reservation wages. Our findings suggest that the behavioural response is too small to be extracted from the variability of the reservation wage data. For policy makers this finding is important. While minimum wages raise earnings and living standards, they can push some workers out of the labour force by increasing their reservation wage beyond the minimum. We do not find any evidence of such a response of the reservation wage of jobseekers to the minimum wage in the UK.

Labour Market Fluctuations and the Housing Net Worth Channel in the EU

The credit-driven housing net worth channel has been identified as a determinant of the sharp drop in US employment between 2007 and 2009. We examine the impact of this channel on the labour market in the EU using panel data for 20 countries covering the period 1996 to 2017. This period saw substantial changes in both credit provision and labour market performance in the EU. The full sample results show changes in housing net wealth having a significant influence on total employment and its traded and non-traded components, with a one per cent change in housing net wealth being associated with about a 0.2 per cent change in total employment. Coefficient values are larger when changes in non-traded employment are the dependent variable, while the wealth effect is greater when negative housing net wealth shocks occur. In contrast to the US evidence, we find significant wage responses to housing net worth shocks arising in the EU.

Global value chains and wages under different wage setting mechanisms

This study examines whether, and how, differences in wage bargaining schemes shape the relationship between global value chains (GVCs) and the wages of workers while considering both GVC participation and position in GVC. Our dataset is derived from the European Structure of Earnings Survey (SES), containing employee–employer data from 18 European countries, merged with sectoral data from the World Input-Output Database (WIOD). The results of an augmented Mincer-type regression show that under national and industry wage bargaining schemes, greater participation in GVCs is associated with lower wages, whereas no adverse impact from GVCs is observed for workers under enterprise bargaining schemes. Finally, numerous extensions and instrumental variable estimations confirm that the type of collective pay agreement may alter the response of wages to both GVC participation and position.