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This paper examines efficiency in the provision and utilization of a congestible public input in a symmetric tax competition framework with wage rigidities. Despite the fact that also lump-sum taxation is available for regional governments, second-best efficiency emerges only as a special case in the non-cooperative equilibrium. In the special case with Cobb-Douglas production, the congestion technology can be shown to be crucial for the analysis of efficiency in the decentralized equilibrium. Assuming decreasing marginal congestion, efficiency in the non-cooperative equilibrium is determined alone by the production and congestion elasticities. In contrast, factor prices such as the level of the wage rigidity and corresponding employment levels are, in addition, important to determine whether both provision and utilization levels of the public input are efficient in case of increasing marginal congestion.

The deep and prolonged recession triggered by the global financial crisis of 2007–2009 led to a large increase in the unemployment rate in most advanced economies. Ten years later, at the time of writing this paper, the recession has long ended, and the subsequent recoveries have brought the unemployment rate to levels close to, and in some cases even below, those at the peak of the previous expansion. In the U.S., the unemployment rate increased from 4.4 percent in May 2007 to 10 percent in November 2009. Since that peak was attained, the unemployment rate has decreased, albeit at a slower pace than in earlier recoveries, down to its current level below 4 percent. Both movements represent, respectively, the largest increase and the largest decrease in the unemployment rate experienced by the U.S. economy during the postwar period. Despite those wide and persistent fluctuations in unemployment, inflation has remained surprisingly stable during the same period. The previous phenomenon, often referred to in the literature as the “twin puzzle", appears to be robust to the measure of inflation and economic slack used, and has also been observed in other advanced economies...

We show that in microdata, as well as in a search and matching model with flexible wages for new hires, wage rigidities of incumbent workers have substantial effects on separations and unemployment volatility. Allowing for an empirically relevant degree of wage rigidities for incumbent workers drives unemployment volatility, as well as the volatility of vacancies and tightness to that in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes. This finding affects the interpretation of a large empirical literature on wage rigidities.

This paper examines the consequences of rapid disinflation for downward wage rigidities in two emerging countries, Brazil and Uruguay. Although wage rigidities are altered by disinflation, in neither of the two countries does price stability eliminate frictions in wage-setting mechanisms. In a context of individual wage negotiations and weak unions, disinflation in Uruguay puts an end to its history of indexation, but strong resistance to nominal wage cuts emerges. In strongly unionized Brazil, wage indexation is highly persistent, but the introduction of inflation targeting by the Central Bank in 1999 moves the focal point of wage negotiations to expected inflation. Financial support from the Government of Catalonia (contract no. 2009SGR189 and the XREPP) and the Government of Spain (through the SFLAC TF and ECO2011-28822 Grant) is gratefully acknowledged.

The inclusion of labor market frictions in the new Keynesian DSGE model overcomes the main drawbacks of the baseline framework. In this paper we show that this extended model, by assuming real wage rigidities, does not replicate the correct wage dynamics and the negative conditional correlation between technology shocks and employment observed in the data, known as the “productivity–employment puzzle” . We show also that these empirical limitations can be overcome by replacing real wage rigidities with nominal wage rigidities, without sacrificing other appealing features of the model. We adopt a Bayesian perspective to estimate the dynamic properties of the model with real wage rigidities and compare them with those of the model with nominal wage rigidities. We show that the evidence favors this latter construction.

The fall in the US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are also shown to account for these patterns, with the participation rate being procyclical in the US since the inception of the crisis and countercyclical in the euro area. We rationalize these diverging developments by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching framework. We show that the “added worker” effect might outweigh the “discouragement effect” if real wage rigidities are allowed for and/or habit in consumers’ preferences is sufficiently strong. We then draw the implications of variable labor force participation for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on inflation stemming from the lack of downward adjustment of real wages are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation associated with wage rigidities.

We show that in micro data, as well as in a search and matching model with endogenous separations and rigid wages, separations and hence employment volatility are non-neutral to wage rigidities of incumbent workers. In contrast to when all wages are flexible, the standard deviation of unemployment in a model with rigid wages for incumbent workers (only) matches the standard deviation in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes in this class of models.

We document two changes in post-war US macroeconomic dynamics: the procyclicality of labour productivity vanished, and the relative volatility of employment rose. We propose an explanation for these changes that is based on reduced hiring frictions due to improvements in information about the quality of job matches and the resulting decline in turnover. We develop a simple model with hiring frictions and variable effort to illustrate the mechanisms underlying our explanation. We show that our model qualitatively and quantitatively matches the observed changes in business cycle dynamics. We gratefully acknowledge financial support from the European Research Council, the Spanish Ministry of Science and Innovation (grants SEJ2006-02235, ECO2008-01665, CSD2006-00016 and Juan de la Cierva); the Generalitat de Catalunya (DIUE grant 2009SGR-1157); and the Barcelona GSE Research Network. Thijs van Rens gratefully acknowledges the hospitality of the UNSW Sydney School of Economics during the final stages of preparing this paper.

We estimate small open economy models with involuntary unemployment using Australian data from 1993 to 2007, focusing on hiring costs and real wage rigidity. We find a strong preference for models with hiring costs, which account for 0.97% of GDP. The data favour models with real over nominal wage rigidity. Impulse responses to technology shocks reveal no productivity-employment puzzle for the preferred model. In the short run, technology shocks, operating through hiring costs via labour demand, explain most unemployment variance, while labour preference shocks explain most real wage variance. Demand shocks dominate supply shocks in explaining output variance. In the long run, these contributions reverse. Out-of-sample conditional forecasts perform well but cannot predict the confidence effects of the crisis.

In this paper, we study the optimal unemployment benefits financing scheme when the economy is subject to labor market imperfections characterized by real wage rigidities and search frictions. The US unemployment insurance financing is such that firms are taxed proportionately to their layoffs to finance unemployment benefits. Using DSGE methodology, we investigate how policy instruments should interact with labor market imperfections. It is shown that wage rigidities in a search and matching environment cause welfare costs, especially in the absence of an incentive-based unemployment insurance. This cost is mainly due to the distorting effect of wage rigidities which generate inefficient separations. We show that the optimal unemployment benefits financing scheme – corresponding to the Ramsey policy – offsets labor market imperfections and allows implementation of the Pareto allocation. The second-best allocation brings the economy close to the Ramsey allocation. The implementation of the optimal policies clearly highlights the role of labor market institutions for short-run stabilization.

Whereas microeconomic studies point to pronounced downward rigidity of nominal wages in the US economy, the standard Phillips curve neglects such a feature. Using a stochastic frontier model we find macroeconomic evidence of a strictly nonnegative error in an otherwise standard Phillips curve in post-war data on the US nonfinancial corporate sector. This error depends on growth in the profit ratio, output, and trend productivity, which should all determine the flexibility of wage adjustments. As the error usually surges during an economic downturn, the empirical model suggests that the downward pressure on inflation arising from higher unemployment in a standard Phillips curve framework is significantly cushioned. This might help to understand the robustness of inflation especially in the most recent past. In general, the cyclical dynamics of inflation appear to be more complex than captured by a conventional Phillips curve

This thesis investigates several macroeconomic aspects of labor markets. First chapter finds that in the US more educated individuals experience lower and less volatile unemployment due to a lower hazard rate of losing a job. A theoretical model with initial on-the-job training illustrates that accumulation of match-specific human capital can explain this empirical pattern. Second chapter develops a theoretical model with state-dependent wage setting. The model predicts that higher wage bargaining costs lead to higher and more volatile unemployment, consistent with some cross-country empirical evidence. Third chapter proposes a method to indirectly measure job-embodied technical change by using data on job tenure. The results show that job-embodied technical change has increased substantially since the midnineties., Aquesta tesi investiga diversos aspectes dels mercats de treball. El primer capítol troba que, als Estats Units, els individus amb un nivell d'educació més elevat experimenten un nivell de desocupació més baix i menys volàtil, degut a una menor probabilitat de perdre el lloc de treball. Un model teòric que incorpora formació inicial al lloc de treball il·lustra que l'acumulació de capital humà específic pot explicar aquesta regularitat empírica. El segon capítol desenvolupa un model teòric amb un mecanisme de fixació de salaris que depèn de l'estat de l'economia. El model prediu que uns costos de negociació salarial més elevats comporten un nivell de desocupació més elevat i més volàtil, de forma consistent amb l'evidència empírica entre països. El tercer capítol proposa un mètode per mesurar, de forma indirecta, el canvi tecnològic incorporat als llocs de treball, mitjançant l'ús de dades sobre l'antiguitat al lloc de treball. Els resultats mostren que el canvi tecnològic incorporat als llocs de treball ha augmentat considerablement des de mitjans dels anys noranta.

This study explores how labor markets have adjusted to temporary business cycle fluctuations since (at least) the 1990s. It focuses on how changes in macroeconomic conditions affect the evolving nature of labor-market adjustments on the other hand. The study pays particular attention to the role of low inflation and international trade in shaping labor-market adjustment. The main focus of the report is on employment, wages and informality. The report analyzes how they are affected by business cycles, and on how low inflation and the nature of external shocks affects labor market dynamics. It is organized as follows. Chapter 1 provides an overview of the cyclical macroeconomic behavior of wages in four LAC countries. Importantly, rather than examining the average cyclical pattern of wages, it focuses on the time varying patterns in the relationship between wages, employment and output. The second part of Chapter 2 studies downward wage rigidities with sectoral data. Chapter 3 moves from wages to quantitative labor-market adjustments and attempts to the answer what limits the expansion of formal employment in LAC? The chapter studies differences, similarities and linkages between formal and informal employment over the business cycle to understand the frustrating persistence of informal employment in the region. Chapter 4 takes a close look at the adjustment of formal labor markets in Northern Mexico during the United States recession of 2008-09. Chapter 5 turns our attention to the distributional costs of recessions by examining how returns to schooling fluctuate with the business cycle, and how they respond to different types of economic shocks. Chapter 6 concludes with a brief summary of the findings and some thoughts about policy implications.

For a long time, the notion of involuntary unemployment occupied in the economic theory a central role. The expression appears very early, from the beginning of the 20th century, when the economists began to be interested in the unemployment. It indicates simply the unemployed who would agree to work at the prevailing wage rate. Keynes gave of this expression one much more narrow, different definition. The involuntary unemployment is, according to him, the unemployment which finds its origin in a deficiency in the demand for goods. At the beginning of 1970s, Phelps, Alchian and Holt set an analysis where the agents have only an imperfect information about wages and jobs. Their ideas were notably taken back and developed by Diamond, Mortensen and Pissarides. In the theory of the equilibrium unemployment, the opposition between voluntary unemployment and involuntary unemployment has no sense whatever we define the involuntary unemployment as Keynes or, more simply, as the excess supply of labour. But, more fundamentally, what this approach rejects is the idea that we can disregard the "frictional unemployment" in the analysis of the determination of the level of the employment. The decomposition of the unemployment in a series of categories - frictional, cyclic, voluntary, involuntary - may not help us in a theoretical or empirical analysis of the unemployment., La notion de chômage involontaire a longtemps occupé dans la théorie économique un rôle central. L'expression apparaît très tôt, dès le début du 20ème siècle, quand les économistes commencèrent à s'intéresser au chômage. Elle désigne simplement les chômeurs qui accepteraient de travailler au taux de salaire courant. Keynes donna de cette expression un définition différente, beaucoup plus étroite. Le chômage involontaire est, selon lui, le chômage qui trouve son origine dans l'insuffisance de la demande de biens. Au début des années 1970, Phelps, Alchian et Holt lui opposèrent une analyse où les agents ne disposent que d'une information imparfaite sur les salaires et les emplois. Leur idées furent reprises et développées notamment par Diamond, Mortensen et Pissarides. Dans la théorie du chômage d'équilibre, l'opposition entre chômage volontaire et chômage involontaire n'a pas de sens, que l'on définisse le chômage involontaire comme le faisait Keynes ou, plus simplement, comme l'offre de travail excédentaire. Mais, plus fondamentalement, ce que cette approche rejette c'est l'idée que l'on peut faire abstraction du " chômage frictionnel " dans l'analyse de la détermination du niveau de l'emploi. La décomposition du chômage en une série de catégories -- frictionnel, cyclique, volontaire, involontaire... -- n'est pas susceptible de nous aider dans une analyse théorique ou empirique du chômage.

Much recent research has focused on the development and analysis of extensions of the New Keynesian framework that model labor market frictions and unemployment explicitly. The present paper describes some of the essential ingredients and properties of those models, and their implications for monetary policy.

The global crisis is now in the rear view mirror and world growth is being restored. In sharp contrast with past episodes of global turmoil, this time the recovery is led by the periphery, specifically by the larger and more dynamic emerging markets (Brazil, China, India, South Korea, Malaysia, Philippines, and Thailand). For this group of emerging markets (EMs), the contraction in economic activity was much smaller than that of rich countries, the recovery started earlier, and the rebound has been much steeper. Latin America and the Caribbean (LAC) are second among emerging regions, after Asia, in the strength of the recovery. The first part of the report focuses on macroeconomic and financial aspects, emphasizing the outlook going forward. Finally, the second part examines some aspects of the adjustment in labor markets during this crisis in comparison to previous ones.

This Report is a third in the series Employment in Poland. It consists of four Parts, devoted to empirical analysis of the impact of macroeconomic shocks on EU New Member States labour markets‘ in 1996-2006; utilization of flexible forms of employment on Polish labor market, determinants of wages and wage inequalities in Poland; effectiveness of ALMP in Poland, respectively. In Part I, we present how the cyclical upturn propagated on Polish labour market in 2003-2007 and how the performance of that market evolved relatively to other EU countries. Then we apply a panel SVECM to study propagation of macroeconomic shocks in eight CEE countries which joined the EU in 2004. We show that demand side shocks (foreign demand and labour demand shocks) were of foremost importance to unemployment and employment fluctuations in the region. At the same time, we argue that the wage shocks, thought of as wage rigidities, were important internal disturbances affecting the developments on the labour markets in the region. Part II is devoted to atypical forms of labour employment. We show that in all CEE countries the incidence of nonstandard employment arrangements is much lower than in Western Europe. Although Poland stands out in the whole EU with its dynamic spread of temporary employment and integration of temporary work agencies in the functioning of the labour market, in general the potential of atypical employment in Poland and other CEE is largely unfulfilled when it comes to work- life balance or supporting the economic activity of people who find it difficult to work full-time due to age or health reasons. In case of Poland, we study in more detailed way the legal, infrastructural and tax-related factors affecting the utilisation of nonstandard forms of employment. In Part III, we study wage developments in Poland from macro- and micro-perspective alike. We argue that wage growth in Poland exhibited a significant inertia during the transition period. We find that the concurrent rise of wage inequalities in Poland was due to the fact that rapid technological progress favoured some professional and social groups more than others. The increasing return on formal education and rising premiums on work in managerial positions as well as increasingly diverse individual and market characteristics of Polish workers seem to play the key role. The public sector stands out with higher wage compression than private sector. We show also that, in international comparison, the gender wage gap in Poland is relatively small. Notwithstanding the above, even if differences in individual and employer characteristics as well as working time are taken into consideration, women still earn about ten percent less than men. Part IV focuses active labour market policies (ALMP). We assess the ALMP spending and structure in Poland and we use the survey, conducted for the purposes of this Report, to study to effectiveness of ALMP. To our knowledge, it is the first attempt at producing a rigorous and comprehensive evaluation of ALMP effectiveness in Poland in the recent years. Applying Propensity Score Matching, we find that intervention and public works turn out to be completely inefficient when it comes to enhancing employment chances of the unemployed. At the same time, even for those programs that are characterised by positive net efficiency, such as internships and traineeships, the deadweight loss is also high, i.e. support is extended to groups whose situation is relatively good, whereas more difficult cases are neglected. Thus, the placement of ALMP participants in Poland is sub-optimal, which partly reflects very poor job broking and counseling done by PES. We complete the report with policy implications.

Trade links imply that business cycle fluctuations are transmitted to trade partners. To the extent that fiscal policy can mitigate business cycle fluctuations this implies that there are international interdependencies in stabilization policies. We analyse the role of fiscal policy in mitigating risk or providing implicit insurance in the presence of capital market imperfections, and how this is affected by adjustment failures (rigid wages). It is shown that there is a welfare case for an active stabilization policy and that it is larger in the presence of adjustment failures (rigid wages). The international interdependency may in the absence of adjustment failures imply that non-cooperative stabilization policies entail excessive stabilization, whereas there is always insufficient stabilization in the presence of adjustment failures.

This paper integrates institutionally determined wage rigidities into an otherwise standard Heckscher-Ohlin model of international trade. It accounts for differences in individual productivities and their implications for individual wage incomes and demand for education. Although preserving the factor-price-equalization property of the global equilibrium approach, the model does not support the view expressed by Davis (1998) that global equilibrium links insulate the US labor market from exogenous shocks. It provides a foundation of the derived from comparative studies that do not consistently account for the global general equilibrium links.

The contrast between the evolution over the last decades of the EU and the US unemployment rates, especially for the low-skilled, is well known. A consensus view is that these different outcomes can be explained by the interactions between common shocks and specific institutional setups. In this paper, we emphasise the interactions between technological changes and wages ridigities. We construct a fully calibrated general equilibrium model with two types of jobs and two types of workers, and with search unemployment. Our simulations show that with wages rigidities, technological changes suffice to generate a continuous rise in the low-skilled unemployment rate and an almost unchanged high-skilled unemployment rate. Without wage rigidities, the unemployment rates remain unchanged but the wage dispersion widens.

Firing frictions and renegotiation costs affect worker and firm preferences for rigid wages versus individualized Nash bargaining in a standard model of equilibrium unemployment, in which workers vary by observable skill. Rigid wages permit savings on renegotiation costs and prevent workers from exploiting the firing friction. For standard calibrations, the model can account for political support for wage rigidity by both workers and firms, especially in labour markets for intermediate skills. The firing friction is necessary for this effect, and reinforces the impact of both turbulence and other labour market institutions on preferences for rigid wages.

Firing frictions and renegotiation costs affect worker and firm preferences for rigid wages versus individualized Nash bargaining in a standard model of equilibrium unemployment, in which workers vary by observable skill. Rigid wages permit savings on renegotiation costs and prevent workers from exploiting the firing friction. For standard calibrations, the model can account for political support for wage rigidity by both workers and firms, especially in labor markets for intermediate skills. The firing friction is necessary for this effect, and reinforces the impact of both turbulence and other labor market institutions on preferences for rigid wages.

Despite a trend toward more flexible rates, more than half the world's countries maintain fixed or managed exchange rates. In the 1980s and 1990s, developing countries as a group progressively liberalized their trade regimes, but some governments defend their exchange rate in actions that run counter to long-run plans for liberalization. Without discussing the relative merits of fixed and flexible exchange rate systems, the authors note that exchange rate management in many countries has resulted in overvaluation of the real exchange rate. Roughly twenty five percent of the countries for which data are available have overvalued exchange rates, with black market premiums from 10 percent to more than 100 percent. After surveying the literature, the authors present lessons from experience about what has worked (or not) in response to crises involving external shocks and external trade deficits - and why. Trying to defend an overvalued exchange rate with protectionist trade policies is a classic pattern, but experience shows such protection does significantly retard the country's growth, and delay its integration into the world trading community. In fact, and overvalued exchange rate is often the root cause of protection, preventing the country from returning to more liberal trade policies that allow growth and integration into the world community without exchange rate adjustment. Most developing countries have downward price and wage rigidities and, with an external trade deficit, require some form of nominal exchange rate adjustment to restore external equilibrium. The authors present cross-country econometric and case study evidence - citing examples from Argentina, Chile, Ghana, the Republic of Korea, Malaysia, Turkey, Uruguay, and Sub-Saharan Africa (including the CFA zone) - that overvalued exchange rates reduce economic growth. Defending the exchange rate, they show, has nor no medium-term benefits, since falling reserves will eventually force devaluation. Better to have devaluation occur without further debilitating losses in reserves and lost productivity because of import controls. After devaluation the exchange rate will reach a new equilibrium, strongly influenced by government and central bank policies.

This paper surveys major empirical regularities concerning changes in earnings inequality in Europe and the US over the past 25 years. Next, it indicates which of these regularities can be explained within the competitive demand-supply framework of analysis and what is left unexplained. Finally, it considers the implications of organizational change as a possible rationale for recent inequality developments.

This paper surveys major empirical regularities concerning changes in earnings inequality in Europe and the U.S. over the past 25 years. Next, it indicates which of these regularities can be explained within the competitive demand-supply framework of analysis and what is left unexplained. Finally, it considers the implications of organizational change as a possible rationale for recent inequality developments.