Transcript Chapter V: Growth and Employment

Chapter V: Growth and Employment
A.
B.
C.
D.
E.
F.
Accounting for Growth
Efficiency of Labor
Solow model and interpretation
The labor market
Real wages
Population and migration
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Labor market equilibrium
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According to the macro analogue of
microeconomic analysis, equilibrium is
established through the real wage
bringing labor supply and demand in line
This analogue is fallacious though,
because labor markets are heavily regulated,
which could entail market disequilibria
As a benchmark, the labor market equilibrium
concept is useful however
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Decomposing employment
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Let’s look at some specific elements
of the labor market
Total hours worked per population
can be decomposed as follows:
H  H  Worker Labor force
 



Pop Worker Labor force
Pop

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Trends in hours worked
per capita
Trends in hours per capita have diverged since 1970
Percentage change 1970-2002
Hours per capita
Hours per worker
Employment rate
Working-age share of total population
30
20
10
0
-10
-20
Source: OECD Employment Outlook, 2004
OEC
D
Irela
nd
Swit
zerla
nd
Aus
tralia
Icela
nd
Can
ada
New
Zeal
and
Unit
ed S
tates
en
ay
Swe
d
m
ngdo
Norw
s
Unit
ed K
i
erlan
d
Italy
Neth
mark
Den
EU-1
5
ium
Belg
Spai
n
n
Japa
any
nd
Germ
Finla
Fran
ce
-30
4
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Measuring unemployment
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Measuring unemployment is tricky
and far from uniform throughout the world
An unemployed person must be
 In employment age and capable to work
 Willing to work at the going wage, everywhere
 Willing to retrain where skills do not match demand
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Part-time and multiple jobs add to complexities
Workers might be discouraged and leave
the labor force
Workers could become “self-employed”
Unemployment is linked to “labor participation”
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Growth and unemployment
in the European Union
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Labor market
movements
Source: Thomas Rothe, IAB
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Definition of
“natural unemployment”
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N is the size of the labor force, L is the number of
employed, and U the number of unemployed
The ratio of hiring is h, and the ratio of firing f
In a dynamic equilibrium (steady state)
the following must hold
h×U = f×L or h×U = f×(N-U).
And
 U  U
U
f
h  f 1 

 N  N h  f
N
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Example:
 U  U
U
f
h  f 1 

 N  N h  f
N
Consider the following example:

 We assume
that 2 percent
of the employed lose their job every month
(average job duration = 4 years)
 20 percent of the unemployed find a new job (average
duration of unemployment = 5 months)
 Then the “natural unemployment rate” is
[0.02] / [0.02 + 0.20] = 0.0909 (or 9.1%).
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NRU and economic policy
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You can reduce the NRU only
by reducing f or increasing h
But f and h are “behavioral” parameters
of the private sector
Economic policy can create incentives,
but the incentive structure is highly complex
We discuss two policies:
 Employment protection regulation (EPL) to reduce f
 State employment and wage subsidization to increase
h
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Example: EPL
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Protection against dismissal (extreme f = 0 ) can drive
firms into bankruptcy (respectively Chapter 11 in the
United States)
Moreover such costs are anticipated by firms and
“capitalized”, i.e. wage levels are lower
It could lead to a reduction of hiring new labor force,
combined with overtime of existing staff
It could also explain the high incidence of temporary
work in some countries
EPL does not necessarily entail a psychology of job
security
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Unemployment insurance
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Insurance against unemployment is more
effective in providing subjective job security
It is effective to combat cyclical unemployment
Where there is substantial structural
unemployment, unemployment insurance adds
to non-wage labor costs, and the scheme may
become unsustainable over time
Moreover, unemployment insurance could entail
“moral hazard”
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State intervention
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Government can increase h by hiring people
in the public sector
It can also subsidize wages in the private sector
In both instances the financing of government
programs has to be skimmed off production
I may entail negative incentives and distort
wages
Financing such measures through government
borrowing is not sustainable over time
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Real wages
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Real wages equal marginal productivity
in theory, but they also depend on the supply
for labor function in market equilibrium
In practice however total factor productivity is
often apportioned independently from the labor
supply function
We shall look at two extreme cases
 The market for unskilled labor
 The market for highly skilled labor
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Unskilled labor:
A historical review
W/P = real wage
Marx’s “Industrial reserve
army”
Subsistence level
F. Lassalle
1825-64
Labor demand
H*
Hours worked
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Unskilled labor
and the wage rate
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As long as the supply for labor function
is flat, increases in the productivity of labor
do not filter into the wage rate, but have a
pure employment (quantity) effect
Conversely, if the supply for labor
is scarce, as for highly qualified and
specialized labor, any productivity
increase is fully reflected in the real wage
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“Dual” labor market

In the “Third World” there is typically
a “dual” labor market characterized by
 A limited supply of qualified workers,
who are also often well organized
 A large number of unskilled workers
less well organized
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Arbitrage between the two markets
is virtually impossible
It produces significant wage differentials
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“Dual” labor market and
increase in productivity
Wage differenettial
(W/P)1
As productivity
increases, the
wage differential
becomes larger
Ls
(W/P)2
Ls constant
L1
L2
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Productivity increase
and “trickling down”
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Total factor productivity has increased
tremendously in industrialized countries
And less skilled labor was not “left behind”
Productivity increase has “trickled down” to all
wage categories, not just the most productive
An important factor was broad compulsory
education and participation in training
Another factor was “organizing labor”
(and social policies)
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Dependency between
skills and employment
Trai n i n g an d e m pl oym e n t rate s are corre l ate d
T raining participationand aggregate labour market performance, second half of the 1990s
Employment rate
Training participation %
70,00
SWE
60,00
DNK
FIN
50,00
GBR
NZL
FRA
NOR
USA
40,00
30,00
ITA
20,00
BEL
ESP
IRL
NLD
CAN
AUS
CZE
AUT
CHE
DEU
GRC
HUN
PRT
POL
10,00
Correlation : 0.63 ***
0,00
50,00
55,00
Source: OECD
60,00
65,00
70,00
75,00
80,00
85,00
90,00
Em ploy m ent rate %
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Organizing labor
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Obviously, the market mechanism creates
inequality, which may lead to social tensions
Almost all countries attempt to counter its effects
The instrument is the standardized work contract
and collective bargaining
It attempts to allocate total factor productivity
among various groups of skill in a “fair” manner
All wage groups are tied together in fixed
relativities, wages are negotiated collectively,
and productivity increases distributed evenly
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Collective bargaining
and labor union density
Union density and coverage, 2000
Percentage of wage and salary earners
100,0
Austria
France
90,0
Sweden
Finland
Netherlands
Italy
Spain Australia Portugal
80,0
Collective bargaining coverage (%)
Belgium
Denmark
Norway
70,0
Germany
Luxembourg
60,0
Slovak Republic
50,0
Poland
40,0
Switzerland
Canada
Hungary
30,0
New Zealand
United Kingdom
Czech Republic
20,0
Japan
United
States
Korea
10,0
Source: OECD
0,0
0,0
10,0
20,0
30,0
40,0
50,0
60,0
Trade union density (%)
70,0
80,0
90,0
100,0
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Collective bargaining
and “sticky” wages
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Collective bargaining introduces an
element of “stickiness” in wage setting
For most, wages are reasonably in line
with productivity, for others they may be
too high or too low
 If they are too high, this tends to create
unemployment
 If they are too low, qualified people could
migrate
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“Minimum” wages and
unemployment
W/P
“Sticky”
real wage
Unemployment
Labor supply
Labor demand
L
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“Efficiency wages”
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The theory is based on the hypothesis that
higher wages could also increase
productivity
It recognizes that a standard work contract
can never be fully defined
The wage becomes an “instrument”
to incite workers to fully and efficiently
comply with their duties that are specified
in the contract only vaguely
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Sam Goldwyn (movie producer)
about one of his best agents:
“We are overpaying him,
but he’s worth it”
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Higher wages
are supposed ...
 ..to reduce transactions costs that could result
from frequent turnover of personnel
 .. to keep in particular qualified personnel
“on board”, and to counter problems of
adverse selection of staff
 .. to increase the motivation and work effort
of staff, and to contain the problem of
“moral hazard”
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Efficiency wages will aggravate inequality
between skilled and unskilled labor
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“Dual” labor market,
efficiency wage, and collective bargaining
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For a “dual” labor market with less qualified
workers (or “outsiders”) and more qualified
workers (“insider”); and
Wages being lumped together through standard
work contracts for collective bargaining; and
Qualified staff (or “insiders”) enjoying efficiency
wages, but less skilled staff (or “outsiders”) not;
then
A wage increase will produce unemployment
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“Dual” labor market,
and collective bargaining
(W/P)2
Wage increase is
“validated” through
higher productivity
Linked by contract
(W/P)1
L1
Unemployment
Employment increase
L2
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“Relative” wage stickiness
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Not “absolute” wage stickiness will produce
unemployment, but “relative” wage stickiness
The model also explains the coexistence
of “unemployment” and “over-employment”
(overtime work) at the same time
It also elucidates, in collective bargaining,
the lack of employers’ resistance against real
wage increases
Collective bargaining will also affect different
groups differently: women, the young, the old
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Rise in real wage dispersion
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Industrialized countries will experience
a rise in real wage dispersion
Its main causes are
 Increased arbitrage in labor markets in a
globalizing world, especially for services
 A skill biased technical change of the
production function, which favors highly
trained work force
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Globalization will also induce migration
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Lester Thurow (1993)
“If capital is borrowable, raw
materials are buyable and
technology is copyable, what are
you left with if you want to run a
high-wage economy? Only skills;
there isn’t anything else.”
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Reading
Abel, Bernanke and Croushore,
Chapter 3.4 and 3.5
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Readings
Reading 5-4 “Labour pains”
The Economist, September 21st 2000
(a bit dated by now, but still interesting)
Reading 5-5 “The dark side of globalisation”,
The Economist, May 29th, 2008
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Discussion 5:
Understanding the global labor market
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What characterizes the global market
for labor?
Should firms only look at wages
when making investment decisions
at an international scale?
How will globalization impinge on the labor
market of the 21st century?
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