Transcript Referendum sulla Abrogazione delle norme sulla

Outline
• Some key definitions
– institutions, markets and wedges
– labor market states
• A simple static framework and the wedge
• Why institutions?
• Learning from reforms: difference-indifferences. Pressures coming from
globalisation.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Key definitions
• An institution is a system of laws, norms or
conventions resulting from a collective choice, and
providing constraints or incentives which alter
individual choices over labor and pay.
• A labor market is a market where labor services
(specified in a vacant job) are sold for a
remuneration called wage
• Institutions create a wedge between the value of
the marginal job for the firm (fl) and the wage (w)
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Labour Market States
• Employed, L (OECD-ILO convention)
• People in working age who, during the reference week (or
day), have made for at least one hour:
– paid work (also paid in nature) or
– self-employed work
• Paid work includes:
– People who are not temporarily working but who have
formally a paid work (e.g. they have a salary, maternity
leave, etc.)
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Labor Market States (cont.)
• Unemployed, U
• People in working age who, during the reference week (or
day), were :
– without either paid or self-employed work,
– willing to work and
– looking for a job.
• Inactive O
• People in working age neither employed nor unemployed
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Normalization rules
– Labour Force (LF): L+ U
– Working Age Population (N): L+U+O
• Unemployment rate: (U/LF)
• Employment rate: (L/N)
• Activity rate (or labor force participation
rate) (LF/N)
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Problems with OECD-ILO
definitions
• Porous participation borders: potential labor force
excluded
• Relaxing job search requirement, less inactive
(about 15% less inactive in the EU countries)
• Some discouraged workers (without work and
willing, but not searching) are undistinguishable
from the unemployed in terms of labor market
transitions (Box 1.3)
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
A framework (generalities)
• Labor supply derived from labor-leisure
(plus home production) choice
• Aggregation assuming that workers do not
choose hours, just participation
• Heterogeneity in reservation wages
• (Derived) labor demand with markups
• Institutions implement a wedge between
labor supply and demand
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Labor/Leisure choice
• Preferences: indifference curves are negatively
sloped in c and l (negative MRS), do not interesect
(no incoherence) and convex (MRS declining with
l)
• Constraints (assuming away non-labor income)
– Hourly wage (w) as slope of the budget constraint
– Maximum amount of hours (l0) to be allocated to labor
(h)/leisure (l)
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Slope of individual labor
supply
• Depends on relative magnitude of
income/substitution effects.
• With leisure as normal good, income effect
negatively affects labor supply
• Substitution effects always positive on hours
worked
• Generally substitution effects dominates for lowwage earners while income effect for high wage
earners
• Income effect irrelevant at participation margins
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Total effect of a wage rise
Money Income
C
192
Observed Change
N2
B
128
N3
N1
64
U2
U1
A
0
5
8
16
Hours of Leisure
16
11
8
0
Hours of Work
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
The Income Effect
Money Income
Income effect
192
B
128
N3
N1
64
U2
U1
A
0
8
9
16
Hours of Leisure
16
8
7
0
Hours of Work
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
The Substitution Effect
Money Income
C
192
Substitution efffect
N2
128
N1
64
U2
A
0
5
8
16
Hours of Leisure
16
11
8
0
Hours of Work
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
The (static) reservation wage
• It is the lowest wage at which a jobseeker is
willing to work (slope of IC at l0 and nonlabor income level)
• At that level elasticity of individual labor
supply is always positive (substitution effect
dominates)
• Reservation wage is increasing in non-wage
income and separates employment from
non-employment
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
From individual to aggregate
labor supply
• Adding up hours worked by each individual
• Heterogeneity in non-wage income (or
preferences), hence in reservation wages, wr
• If individuals can only offer fixed number
of hours of work, then aggregate labour
supply follows distribution of wr (N F(wr)
where N is working age population) and is
always increasing in wages
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
0
.2
.4
.6
.8
1
Participation rate
Aggregate labour supply
-5
0
error
cum_ger
cum_bel
cum_fra
5
cum_dnk
cum_lux
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
(Derived) labor demand
and equilibrium
• From profit maximisation of individual
firms
• The optimal employment level equals the
value of the marginal product of labour (fl)
to the wage (w): f (l) = w
• As fl l< 0, labour demand is decreasing in
wages
• Role of competition in product markets
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Why Institutions?
Three arguments for their existence:
1. Efficiency: a competitive LM does not
exist
2. Equity: as no lump-sum transfer is
available, redistribution is distortionary
3. Policy failure: heterogeneity and powerful
minority interest groups; inertia of
institutions
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Institutions and wedges
L1S (w)
w
w
U
LS (w)
L0S (w)
Wedge
Wedge
Ld (w)
L
Price-Based Institutions and the Wedge
L
Ld (w)
L
Quantity-Based Institutions and the Wedge
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
L
Institutions and adjustment to shocks
Increasing employment bias
of LM institutions?
• In the 1950s and 1960s US enviously looking at
European institutions. In the 1980s and 1990s the
other way round.
• Interactions between shocks and institutions (e.g.,
shocks create U, EPL or UBs make it longlasting)
• Under stronger competitive pressures, LM
institutions may have higher costs in terms of
foregone employment
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
More competition in product markets
(globalisation) increases the employment
costs of institutions
S
w
D1
D0
∆E
∆E
Stronger pressures for
institutional reforms
• fRDB inventory of labor market and social
policy reforms
• Classified by area (e.g. EPL, UBs, RET,
MIG, WT), direction (increasing / reducing
the wedge) and scope (structural / marginal)
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Acceleration of reforms
100
90
EPL
NEB
80
N° of Reforms
70
60
50
40
30
20
10
0
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Remainder of the course
• Institutions by institution
• Outline of each lecture
– description of the institution (measurement)
– theory (does it implement the wedge? how?
effects on employment and wages)
– evidence (possibly difference-in-differences)
– policy issues
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.