Selective hiring and welfare analysis in labor market models

Firms select not only how many, but also which workers to hire. Yet, in standardsearch models of the labor market, all workers have the same probability of being hired.We argue that selective hiring crucially affects welfare analysis. Our model is isomorphicto a search model under random hiring but allows for selective hiring. With selectivehiring, the positive predictions of the model change very little, but the welfare costsof unemployment are much larger because unemployment risk is distributed unequallyacross workers. As a result, optimal unemployment insurance may be higher and welfareis lower if hiring is selective.

How important is the intensive margin of labor adjustment?

Using new quarterly data for hours worked in OECD countries, Ohanian and Raffo (2011) argue that in many OECD countries, particularly in Europe, hours per worker are quantitatively important as an intensive margin of labor adjustment, possibly because labor market frictions are higher than in the US. I argue that this conclusion is not supported by the data. Using the same data on hours worked, I find evidence that labor market frictions are higher in Europe than in the US, like Ohanian and Raffo, but also that these frictions seem to affect the intensive margin at least as much as the extensive margin of labor adjustment.

The vanishing procyclicality of labor productivity

We document three changes in postwar US macroeconomic dynamics: (i) theprocyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wagehas risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model withlabor market frictions, variable effort, and endogenous wage rigidities to illustratethe mechanisms underlying our explanation. We show that the reduction in frictionsmay also have contributed to the observed decline in output volatility.

Employment consequences of restrictive permanent contracts: Evidence from Spanish labor market reforms

Temporary employment contracts allowing unrestricted dismissals wereintroduced in Spain in 1984 and quickly came to account for most new jobs.As a result, temporary employment increased from around 10% in themid-eighties to more than 30% in the early nineties. In 1997, however,the Spanish government attempted to reduce the incidence of temporaryemployment by reducing payroll taxes and dismissal costs for permanentcontracts. In this paper, we use individual data from the Spanish LaborForce Survey to estimate the effects of reduced payroll taxes anddismissal costs on the distribution of employment and worker flows. Weexploit the fact that recent reforms apply only to certain demographicgroups to set up a natural experiment research design that can be usedto study the effects of contract regulations. Our results show that thereduction of payroll taxes and dismissal costs increased the employmentof young workers on permanent contracts, although the effects for youngwomen are not always significant. Results for older workers showinsignificant effects. The results suggest a moderately elastic responseof permanent employment to non-wage labor costs for young men. We alsofind positive effects on the transitions from unemployment and temporaryemployment into permanent employment for young and older workers, althoughthe effects for older workers are not always significant. On the otherhand, transitions from permanent employment to non-employment increasedonly for older men, suggesting that the reform had little effect ondismissals.

Product market deregulation and labor market outcomes

We consider the dynamic relationship between product market entry regulationand equilibrium unemployment. The main theoretical contribution is combininga Mortensen-Pissarides model with monopolistic competition in the goods marketand individual wage bargaining. Product market competition affects unemploymentvia two channels: the output expansion effect and a countervailing effect dueto a hiring externality. Competition is then linked to barriers to entry. Acalibrated model compares a high-regulation European regime to a low-regulationAnglo-American one. Our quantitative analysis suggests that under individualbargaining, no more than half a percentage point of European unemployment ratescan be attributed to entry regulation.

Labor markets and monetary policy: A new-Keynesian model with unemployement

We construct a utility-based model of fluctuations, with nominal rigidities andunemployment, and draw its implications for the unemployment-inflation trade-off and for the conduct of monetary policy.We proceed in two steps. We first leave nominal rigidities aside. We show that,under a standard utility specification, productivity shocks have no effect onunemployment in the constrained efficient allocation. We then focus on theimplications of alternative real wage setting mechanisms for fluctuations in un-employment. We show the role of labor market frictions and real wage rigiditiesin determining the effects of productivity shocks on unemployment.We then introduce nominal rigidities in the form of staggered price setting byfirms. We derive the relation between inflation and unemployment and discusshow it is influenced by the presence of labor market frictions and real wagerigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy.

Endogenous labor market participation and the business cycle

Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates and cannot match unemployment variability relative to GDP. We embed endogenous participation in a simple, tractable job market matching model, show analytically how variations in the participation rate are driven by the cross-sectional density of home productivity near the participation threshold, andhow this density translates into an extensive-margin labor supply elasticity. A calibration of the model to macro data not only matches employment and participation variabilities but also generates strongly countercyclical unemployment rates. With some wage rigidity the model also matches unemployment variations well. Furthermore, the labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US.

Wage inequality in a frictional labor market

Wage inequality in the United States has grown substantially in thepast two decades. Standard supply-demand analysis in the empiricsof inequality (e.g.Katz and Murphy (1992)) indicates that we mayattribute some of this trend to an outward shift in the demand forhigh skilled labor. In this paper we examine a simple static channelin which the wage premium for skill may grow -increased firm entry.We consider a model of wage dispersion where there are two types ofworkers and homogeneous firms must set wages and preferences forwhat type of worker they would like to hire. We find that both thewage differential and the demand for high skill workers can increasewith the proportion of high skill workers -these high skill workerstherefore 'create' their own demand without exogenous factors. Inaddition, within group wage inequality can increase in step with thebetween group wage inequality. Simulations of the model are providedin order to compare the findings with empirical results.

The labor market effects of payroll taxes in a middle-income country: Evidence from Colombia

We use a panel of manufacturing plants from Colombia to analyze how the risein payroll tax rates over the 1980 s and 1990 s affected the labor market.Our estimates indicate that formal wages fall by between 1.4% and 2.3% as aresult of a 10% rise in payroll taxes. This 'less-than-full-shifting' islikely to be the result of weak linkages between benefits and taxes and thepresence of downward wage rigidities induced by a binding minimum wage inColombia. Because the costs of taxation are only partly shifted fromemployers to employees, employment should also fall. Our results indicatethat a 10% increase in payroll taxes lowered formal employment by between4% and 5%. In addition, we find less shifting and larger disemploymenteffects for production than non-production workers. These results suggestthat policies aimed at boosting the relative demand of low-skill workers byreducing social security taxes on those with low earnings may be effectivein a country like Colombia, especially if tax cuts are targeted to indirectbenefits.

Effects of employment protection and product market regulations on the Italian labor market

Labor market regulations have often being blamed for high and persistentunemployment in Europe, but evidence on their impact remains mixed. Morerecently, attention has turned to the impact of product market regulationson employment growth. This paper analyzes how labor and product marketregulations interact to affect turnover and employment. We present a matchingmodel which illustrates how barriers to entry in the product market mitigatethe impact of labor market deregulation. We, then, use the Italian SocialSecurity employer-employee panel to study the interaction between barriersto entry and dismissal costs. We exploit the fact that costs for unjustdismissals in Italy increased for firms below 15 employees relative to biggerfirms after 1990. We find that the increase in dismissal costs after 1990decreased accessions and separations in small relative to big firms,especially for women. Moreover, consistent with our model, we find evidencethat the increase in dismissal costs had smaller effects on turnover for womenin sectors faced with strict product market regulations.

Income taxation in a frictional labor market

A new model of wage dispersion is used to examine welfare aspects of income taxation. The model retains the dynamics of wage posting modelswhile exogenizing search e¤ort, therefore allowing more insight into policy issues. The results highlight effects that standard analyses do not take into account. The optimal income tax should depend on an incidenceeffect between workers and firms. This incidence effect arises from firmstrying to lower wages as much as possible. An employment tax proves, incertain cases, to be the best method to encourage labor force participation.

Protective or counter-productive? Labor market institutions and the effect of immigration on EU natives

We estimate the effect of immigrant flows on native employment in WesternEurope, and then ask whether the employment consequences of immigrationvary with institutions that affect labor market flexibility. Reducedflexibility may protect natives from immigrant competition in the nearterm, but our theoretical framework suggests that reduced flexibility islikely to increase the negative impact of immigration on equilibriumemployment. In models without interactions, OLS estimates for a panel ofEuropean countries in the 1980s and 1990s show small, mostly negativeimmigration effects. To reduce bias from the possible endogeneity ofimmigration flows, we use the fact that many immigrants arriving after1991 were refugees from the Balkan wars. An IV strategy based onvariation in the number of immigrants from former Yugoslavia generateslarger though mostly insignificant negative estimates. We then estimatemodels allowing interactions between the employment response toimmigration and institutional characteristics including business entrycosts. These results, limited to the sample of native men, generallysuggest that reduced flexibility increases the negative impact ofimmigration. Many of the estimated interaction terms are significant,and imply a significant negative effect on employment in countrieswith restrictive institutions.

The Political Economy of Active Labor-Market Policy

Active labor-market policies (ALMPs) have developed significantly over the past two decades across Organization for Economic Cooperation and Development (OECD) countries, with substantial cross-national differences in terms of both extent and overall orientation. The objective of this article is to account for cross-national variation in this policy field. It starts by reviewing existing scholarship concerning political, institutional, and ideational determinants of ALMPs. It then argues that ALMP is too broad a category to be used without further specification, and it develops a typology of four different types of ALMPs: incentive reinforcement, employment assistance, occupation, and human capital investment. These are discussed and examined through ALMP expenditure profiles in selected countries. The article uses this typology to analyze ALMP trajectories in six Western European countries and shows that the role of this instrument changes dramatically over time. It concludes that there is little regularity in the political determinants of ALMPs. In contrast, it finds strong institutional and ideational effects, nested in the interaction between the changing economic context and existing labor-market policies.

A Behavioral Account of the Labor Market: The Role of Fairness Concerns

In this paper, we argue that important labor market phenomena can be better understood if one takes (a) the inherent incompleteness and relational nature of most employment contracts and (b) the existence of reference-dependent fairness concerns among a substantial share of the population into account. Theory shows and experiments confirm that, even if fairness concerns were to exert only weak effects in one-shot interactions, repeated interactions greatly magnify the relevance of such concerns on economic outcomes. We also review evidence from laboratory and field experiments examining the role of wages and fairness on effort, derive predictions from our approach for entry-level wages and incumbent workers' wages, confront these predictions with the evidence, and show that reference-dependent fairness concerns may have important consequences for the effects of economic policies such as minimum wage laws.