Equilibrium Wage Research Articles

Markups and Inequality

Abstract We characterize optimal product market policy in an unequal economy in which firm ownership is concentrated and markups increase with firm market shares. We study the problem of a utilitarian regulator who designs revenue-neutral interventions in the product market. We show that optimal policy increases product market concentration. This is because policies that encourage larger producers to expand improve allocative efficiency, increase the demand for labor and equilibrium wages. We derive these results both in a static Mirrleesian setting in which we impose no constraints on the shape of interventions, as well as in a dynamic economy with wealth accumulation. In our dynamic economy optimal policy reduces wealth and income inequality by redistributing market share and profits from medium-sized businesses, which are primarily owned by relatively rich entrepreneurs, to larger diversified corporate firms.

Employer vs government parental leave: Labour market effects

A relatively large number of firms in Australia and in the US offer employer-funded parental leave to their employees. We introduce employer-funded parental leave in a theoretical labour search and matching model. Firms choose the duration of paid parental leave offered to prospective employees. Matched firms and workers then negotiate wages through a Nash bargaining process. We show that employer-funded leave allows firms to pay lower wages. In this context, extending government-funded parental leave reduces the benefits of employer-funded leave to firms, reducing total leave duration. It also affects equilibrium wages and employment. We calibrate the model using Australian data. We show that increases in both government-funded leave duration and replacement rate can be welfare improving and, in particular, the welfare effects of government leave duration display an inverted U-shape.

Global directed technical change model with fiscal and monetary policies, and public debt

We develop an endogenous growth model with North–South interactions, monetary policy, and a multi-dimensional role for fiscal policy. To boost economic performance, the government of the less developed country subsidizes R&D and intermediate goods production. Besides, to account for the effects of excessive public debt, we introduce a negative externality on productivity and a risk premium effect. Our findings reveal that the steady-state growth rate of both economies depends positively on the subsidies in the South and negatively on the public debt’s externality on productivity and the risk premium affecting the indebted economy. Additionally, public debt externalities increase the equilibrium wage inequality, making it more significant in the South. To minimize these effects, both countries can agree to mutualize their debts to overcome the risk premium. Then, the economy’s steady-state growth rate would increase in both countries. Finally, several policy implications were retrieved.

Minimum wage and corporate OFDI

Corporate OFDI can help firms fully utilize opportunities and resources on a global scale, enhancing their global competitiveness. However, the findings of this paper indicate that the minimum wage standards in the regions where firms are located can lead to a crowding-out effect on the level of outward foreign direct investment by causing wage levels to be above the market equilibrium wage level. Furthermore, this impact is more pronounced in non-state-owned enterprises and in firms located in regions with lower levels of marketization.

Sequential job posting and equilibrium wage dispersion with bunching

In a model where new jobs cannot start until some time in the future, we show that firms post vacancies in advance when the match surplus is high, and they post more vacancies but lower wages as the job starting time gets closer. The number of vacancies increases over time because firms prefer to pay the vacancy cost later rather than sooner. Wages decrease over time because vacancies posted early have to compete with a larger number of vacancies posted later. An equilibrium wage distribution with both a continuous component and a mass point exists even with identical and rational agents on both sides of the market. Wage dispersion is generated by the inter-temporal competition between vacancies posted at different times, and a mass point emerges due to the lack of wage competition among vacancies posted at the same time. Consistent with the model, we find college students who graduate in May are more likely to receive an offer in April than March, and the distribution of wage offers received in March first-order stochastically dominates the distribution of wage offers received in April.

Offshoring, Globalization, Skill: Impacts of International Offshoring on Employment and Wages

The phenomenon of offshoring has become a prominent topic in contemporary economic discussions, closely tied to globalization and communication. Offshoring involves importing input items from foreign countries at a lower cost, enabling cost-effective production. However, it raises concerns among workers regarding job loss and wage reduction. The aspect of collective bargaining, crucial in understanding the dynamics of offshoring, has often been overlooked in previous research. This journal paper aims to address this research gap by examining the impact of collective bargaining on determining equilibrium wages in the context of offshoring. Through a comprehensive analysis of three cases—Autarky, Small Country, and a two-country scenario—we explore how fluctuations in offshoring costs influence employment levels and wage rates. Additionally, we investigate the policy implications of offshoring decisions in one country and their effects on its partner country. The study also considers the role of skill acquisition in the offshoring process and its multifaceted impact on the labor market. By shedding light on the influence of collective bargaining in determining equilibrium wages within the offshoring framework, this research provides valuable insights for policymakers, academics, and industry practitioners. The findings contribute to a more comprehensive understanding of the complexities surrounding offshoring and its implications for the labor market.

Compensating Wage Differentials in Labor Markets: Empirical Challenges and Applications

The model of compensating wage differentials is among the cornerstone models of equilibrium wage determination in labor economics. However, empirical estimates of compensating differentials have faced persistent credibility challenges. This article summarizes the Rosen model of compensating differentials and chronicles the advances, setbacks, and lessons learned from empirical studies. The progression from cross-sectional to panel models alleviated biases caused by unobserved human capital but yielded new insights into the importance of other biases, including those caused by labor market frictions and endogenous job mobility. I discuss recent approaches that use matched employer-employee data and quasi-random variation in job amenities to address some of these challenges. I then present two examples of applications of compensating differentials: the evaluation public health and safety policies that rely on the value of statistical life, and the measurement and interpretation of earnings inequality.

Food system labor and bargaining power

Historically, pandemics lead to labor shortages, and the COVID-19 pandemic of 2020-21 proved to be no different. While there are many explanations for supply-chain issues reported in a number of industries, the proximate cause for ongoing problems in producing, processing, and delivering food to consumers has been attributed to a lack of labor. If this is the case, then the apparent shortage is likely to manifest in greater bargaining power by workers in the food and agriculture industry, defined generally, during the COVID pandemic. In this paper, we test whether the COVID-19 pandemic is associated with greater bargaining power among food and agriculture workers using a structural model of labor search-and-bargaining, and examine the effect of policy responses to COVID-19 on labor-market outcomes. Using data from the American Community Survey (ACS, Bureau of Census) for wage outcomes in 2019 and 2020, we find that the COVID pandemic was responsible for a 5.7% increase in bargaining power for employed workers. Our counterfactual simulations examine the impact of two labor-market interventions – minimum-wages and unemployment insurance – on equilibrium wages. We find that lower minimum wages leave more employment surplus to employers, allowing them to bid up equilibrium wages, while more generous unemployment insurance reduces the supply of labor, and increases equilibrium wages.

Improving the system of wage regulation in Kazakhstan

The article analyzes the current practice of wage regulation in Kazakhstan. The purpose of the article is based on the results of a comprehensive analysis of official statistics for 2001-2021 and the current system of wage regulation, to identify the existing problems and possible solutions. To conduct a comparative analysis, statistical data from OECD Data and OECD Statistics were used, which mainly reflect the dynamics of Germany's indicators in the field of wage regulation. The wage regulation mechanism in a market economy is considered as a system consisting of three closely interconnected parts (blocks): - formation of an equilibrium wage rate in the labor market; - use of the system of social partnership; - implementation of measures of state influence. The analysis revealed that in Kazakhstan, supply and demand in the labor market do not have an adequate impact on the formation of the market wage rate, due to the low level of maturity of social and labor relations, the interests of employers dominate over the interests of employees, the effectiveness of collective agreements in regulating wages is very low . The role of the state in achieving a specific relationship between social justice and economic efficiency is not fully   manifested. The agreed position of social partners on a reasonable increase in the share of wages in GDP should be achieved in the course of concluding a General Agreement between the Government of the Republic of Kazakhstan, republican associations of employers and republican associations of trade unions. Based on the experience of the United States, it is advisable to create a National Labor Relations Administration, which will also deal with the certification of trade unions. Increasing the wages of workers should become a priority goal of socio-economic policy.

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.

Education choices and job market characteristics

We propose a simple three-stage model where heterogeneous schools compete via tuition fees, individuals with the ex-ante unknown ability make their education choices to (eventually) get a diploma and reveal their ability, and finally the job market determines the assignment of workers to firms and the equilibrium wages. In equilibrium, wages in the labor market and schools’ fees and individuals’ school choices are strongly related. We also analyze the effects of the existence of a public school or a subsidy on social welfare.

Efficiency Wage Hypothesis—The Case of Pakistan

The goal of this section is to point out the observed difficulties with the classical/neoclassical theory of labour markets. According to classical and neoclassical economics, the labour market is a market like any other market. The equilibrium wage is determined by the intersection of the supply and demand for labour.

Search, technology choice, and unemployment

AbstractTechnology variations among countries account for a significant part of their income differences. In this paper, a firm's technology choice is embedded in a search theoretic framework for unemployment. More advanced technology is assumed to have a higher setup cost, but it is more productive. The model is tractable and the following results are derived analytically. An increase in the unemployment benefit leads to an increase in the equilibrium wage rate, giving an incentive to firms to choose a more advanced technology. Thus, this result regarding unemployment insurance in models with wage posting carries through with Nash bargaining as well. As a consequence, the equilibrium unemployment rate increases. Furthermore, an increase in the bargaining power of workers increases the unemployment rate but has an ambiguous impact on the equilibrium level of technology and the wage rate. Finally, an increase in the exogenous job separation rate or the interest rate increases the unemployment rate and decreases the wage rate but does not affect the equilibrium level of technology.

The Impact of an Increase to a Minimum Wage on the Iowa Egg Industry

AbstractThis paper evaluates the impact of an increase in the federal or state minimum wage on the egg industry, where labor is a key input. This analysis uses an for Iowa, a key egg-producing state. When spread across the industry, the total negative effects of the increased minimum wage do not appear to be economically significant. This is due largely to the Iowa egg industry’s current equilibrium wage of $13.50 an hour. Thus, a $15.00 minimum wage adds only $1.50; however, to stay competitive, egg industry employers likely would increase their wage above $15.00. Despite these seemingly small effects, egg producers may struggle in the short run to respond to immediate labor expenses should Iowa or the United States not phase in its minimum wage over the course of several years.

Search equilibrium with unobservable investment

This article studies a wage posting game in which workers invest in human capital so as to reduce the disutility of labor. If investment were observable, then no workers would invest in skills due to the holdup problem, and all employers would offer the monopsony wage as in the Diamond paradox. With unobservable investment, however, the equilibrium wage and skill distributions are nondegenerate, despite agents being ex ante identical. An asymptotic efficiency result is obtained in which investment converges to the efficient level as the arrival rate of job offers tends to infinity, with firms receiving all the surplus in the market. The model generates distinctive comparative statics predictions, and the theory can rationalize any wage distribution that satisfies a few regularity conditions. The analysis is robust to the inclusion of some forms of direct search costs.

Wage offers and on‐the‐job search

AbstractWe study the wage‐setting problem of an employer with private information about demand for its product when workers can engage in costly on‐the‐job search. Employers understand that low wage offers may convey bad news that induces workers to search. The unique perfect sequential equilibrium wage strategy is characterized by: (i) pooling by intermediate‐revenue employers on a common wage that just deters search, (ii) discontinuously lower revealing offers by low‐revenue employers for whom the benefit of deterring search fails to warrant the required high pooling wage and (iii) high revealing offers by high‐revenue employers seeking to deter aggressive raiders.

Equilibrium Wage Rigidity in A Search and Matching Model with Replacement Hiring

Equilibrium Wage Rigidity in A Search and Matching Model with Replacement Hiring

Dynamic Evaluation Design

A principal owns a firm, hires an agent of uncertain productivity, and designs a dynamic policy for evaluating his performance. The agent observes ongoing evaluations and decides when to quit. When not quitting, the agent is paid a wage that is linear in his expected productivity; the principal claims the residual performance. After quitting, the players secure fixed outside options. I show that equilibrium is Pareto efficient. For a broad class of performance technologies, the equilibrium wage deterministically grows with tenure. My analysis suggests that endogenous performance evaluation plays an important role in shaping careers in organizations. (JEL D21, D82, D83, J24, J31, J41, M51)

Trade and minimum wages in general equilibrium: Theory and evidence

This paper develops a new model with heterogeneous firms under perfect competition in a Heckscher-Ohlin setting. We derive a novel prediction regarding the effect of minimum wages on selection, namely that a binding minimum wage will raise (or lower) TFP at the firm and industry level depending on whether the capital intensity of entry costs exceeds (falls short of) that of production. Exploiting rich regional variation in minimum wages across Chinese counties and using firm level production data, we find robust evidence in support of causal effects of minimum wages consistent with our theoretical predictions.

Quantifying Market Power and Business Dynamism

We propose a general equilibrium model with oligopolistic output markets where two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of entry, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching data on markups, labor reallocation and costs, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure yield positive welfare effects through reallocation and selection, but off-setting negative effects from dead-weight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify explain and decompose cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation via reallocation toward larger, more productive firms.