Cohort effects within firms, and their implications for labour market outcomes and the business cycle

The project aims to achieve two objectives. First, we are analysing the labour market implications of the assumption that firms cannot pay similarly qualified employees differently according to when they joined the firm. For example, if the general situation for workers improves, a firm that seeks to hire new workers may feel it has to pay more to new hires. However, if the firm must pay the same wage to new hires and incumbents due to equal treatment, it would either have to raise the wage of the incumbents, or offer new workers a lower wage than the firm would do otherwise. This is very different from the standard assumption in economic analysis that firms are free to treat newly hired workers independently of existing hires. Second, we will use detailed data on individual wages to try to gauge whether (and to what extent) equity is a feature of actual labour markets. To investigate this, we are using two matched employer-employee panel datasets, one from Portugal and the other from Brazil. These unique datasets provide objective records on millions of workers and their firms over a long period of time, so that we can identify which firms employ which workers at each time. The datasets also include a large number of firm and worker variables.

A Producer Theory with Business Risks

In this paper, we consider a producer who faces uninsurable business risks due to incomplete spanning of asset markets over stochastic goods market outcomes, and examine how the presence of the uninsurable business risks affects the producer's optimal pricing and production behaviours. Three key (inter-related) results we find are: (1) optimal prices in goods markets comprise ‘markup’ to the extent of market power and ‘premium’ by shadow price of the risks; (2) price inertia as we observe in data can be explained by a joint work of risk neutralization motive and marginal cost equalization condition; (3) the relative responsiveness of risk neutralization motive and marginal cost equalization at optimum is central to the cyclical variation of markups, providing a consistent explanation for procyclical and countercyclical movements. By these results, the proposed theory of producer leaves important implications both micro and macro, and both empirical and theoretical.

The Corrosion of Career? - Occupational Trajectories of Business Economists and Engineers in Switzerland

Achievement careers are regarded as a distinctive element of the post-war period in occidental societies. Such a career was at once a modal trajectory of the modern parts of middleclass men and a social emblem for progress and success. However, if the achievement career came to be a biographical pattern with great normative power, its precise sequential course remained vague. Theories of the 1960s and 1970s described it as an orderly advancement within large firms. By the 1990s, scholars postulated an erosion of the organizational structures that once contributed to the institutionalization of careers, accompanied by a weakening of the normative weight of the achievement career by management discourse. We question the thesis of the corrosion of achievement career by analysing the trajectories of 442 engineers and business economists in Switzerland in regard to their orderliness, loyalty, and temporal rhythm. An inspection of types of careers and cohorts reveals that even if we face a decline of loyalty over time, hierarchical orderliness is not touched by those changes. Foremost, technical-industrial careers fit the loyal and regular pattern. Hence, this trajectory-type represents only a minority and is by far the slowest and least successful in terms of hierarchical ascension.

The past, present and future of central banking

The financial crisis, on the one hand, and the recourse to ‘unconventional’ monetary policy, on the other, have given a sharp jolt to perceptions of the role and status of central banks. In this paper we start with a brief ‘contrarian’ history of central banks since the second world war, which presents the Great Moderation and the restricted focus on inflation targeting as a temporary aberration from the norm. We then discuss how recent developments in fiscal and monetary policy have affected the role and status of central banks, notably their relationships with governments, before considering the environment central banks will face in the near and middle future and how they will have to change to address it.

Extending contingency: the impact of strategy, technology, size and business environment on the organisational form of small Chinese firms

This paper is inspired by articles in the last decade or so that have argued for more attention to theory, and to empirical analysis, within the well-known, and long-lasting, contingency framework for explaining the organisational form of the firm. Its contribution is to extend contingency analysis in three ways: (a) by empirically testing it, using explicit econometric modelling (rather than case study evidence) involving estimation by ordered probit analysis; (b) by extending its scope from large firms to SMEs; (c) by extending its applications from Western economic contexts, to an emerging economy context, using field work evidence from China. It calibrates organizational form in a new way, as an ordinal dependent variable, and also utilises new measures of familiar contingency factors from the literature (i.e. Environment, Strategy, Size and Technology) as the independent variables. An ordered probit model of contingency was constructed, and estimated by maximum likelihood, using a cross section of 83 private Chinese firms. The probit was found to be a good fit to the data, and displayed significant coefficients with plausible interpretations for key variables under all the four categories of contingency analysis, namely Environment, Strategy, Size and Technology. Thus we have generalised the contingency model, in terms of specification, interpretation and applications area.

Asset Prices, Business Cycles, and Markov-Perfect Fiscal Policy when Agents are Risk-Sensitive

We study a business cycle model in which a benevolent fiscal authority must determine the optimal provision of government services, while lacking credibility, lump-sum taxes, and the ability to bond finance deficits. Households and the fiscal authority have risk sensitive preferences. We find that outcomes are affected importantly by the household's risk sensitivity, but not by the fiscal authority's. Further, while household risk-sensitivity induces a strong precautionary saving motive, which raises capital and lowers the return on assets, its effects on fluctuations and the business cycle are generally small, although more pronounced for negative shocks. Holding the stochastic steady state constant, increases in household risk-sensitivity lower the risk-free rate and raise the return on equity, increasing the equity premium. Finally, although risk-sensitivity has little effect on the provision of government services, it does cause the fiscal authority to lower the income tax rate. An additional contribution of this paper is to present a method for computing Markov-perfect equilibria in models where private agents and the government are risk-sensitive decisionmakers.

The Optimal Distribution of the Tax Burden over the Business Cycle

This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income households. A model incorporating capital-skill complementarity in production and differential access to capital and labour markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We .nd that the tax rate for high income agents is optimally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be very volatile and counter-cyclical. We further find that the optimal response to output-enhancing capital equipment technology and spending cuts is to increase the progressivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.

Cyclical and Welfare Effects of Public Sector Unions in a Real-Business-Cycle Model

Motivated by the highly-unionized public sectors, the high public shares in total employment, and the public sector wage premia observed in Europe, this paper examines the importance of public sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a signifi cant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary e ffect of contractionary tax reforms by generating greater tax rate changes, thus producing signi ficantly higher welfare losses.

On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework

This paper studies the wasteful e ffect of bureaucracy on the economy by addressing the link between rent-seeking behavior of government bureaucrats and the public sector wage bill, which is taken to represent the rent component. In particular, public o fficials are modeled as individuals competing for a larger share of those public funds. The rent-seeking extraction technology in the government administration is modeled as in Murphy et al. (1991) and incorporated in an otherwise standard Real-Business-Cycle (RBC) framework with public sector. The model is calibrated to German data for the period 1970-2007. The main fi ndings are: (i) Due to the existence of a signi ficant public sector wage premium and the high public sector employment, a substantial amount of working time is spent rent-seeking, which in turn leads to signifi cant losses in terms of output; (ii) The measures for the rent-seeking cost obtained from the model for the major EU countries are highly-correlated to indices of bureaucratic ineffi ciency; (iii) Under the optimal scal policy regime,steady-state rent-seeking is smaller relative to the exogenous policy case, as the government chooses a higher public wage premium, but sets a much lower public employment, thus achieving a decrease in rent-seeking.

Tax smoothing in a business cycle model with capital-skill complementarity

This paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity, endogenous skill formation and stochastic shocks to public consumption as well as total factor and capital equipment productivity. Our main finding is that an empirically relevant restriction which does not allow the relative supply of skilled labour to adjust in response to aggregate shocks, signi cantly changes the cyclical properties of optimal labour taxes. Under a restricted relative skill supply, the government fi nds it optimal to adjust labour income tax rates so that the average net returns to skilled and unskilled labour hours exhibit the same dynamic behaviour as under fl exible skill supply.

Genuine savings and future well-being in Germany, 1850-2000

Genuine Savings (GS), also known as ‘net adjusted savings’, is a composite indicator of the sustainability of economic development. Genuine Savings reflects year-on-year changes in the total wealth or capital of a country, including net investment in produced capita, investment in human capital, depletion of natural resources, and damage caused by pollution. A negative Genuine Savings rate suggests that the stock of national wealth is declining and that future utility must be less than current utility, indicating that economic development is non-sustainable (Hamilton and Clemens, 1999). We make use of data over a 150 year period to examine the relationship between Genuine Savings and a number of indicators of well-being over time, and compare the relative changes in human, produced, and components of natural capital over the period. Overall, we find that the magnitude of genuine savings is positively related to changes in future consumption, with some evidence of a cointegrating relationship. However, the relationships between genuine savings and infant mortality or average heights are less clear.

Unemployment and Endogenous Reallocation over the Business Cycle

This paper studies unemployed workers’ decisions to change occupations, and their impact on fluctuations in aggregate unemployment and its underlying duration distribution. We develop an analytically and computationally tractable stochastic equilibrium model with heterogenous labor markets. In this model three different types of unemployment arise: search, rest and reallocation unemployment. We document new evidence on unemployed workers’ gross occupational mobility and use it to calibrate the model. We show that rest unemployment is the main driver of unemployment fluctuations over the business cycle and causes cyclical unemployment to be highly volatile. The resulting unemployment duration distribution generated by the model responds realistically to the business cycle, creating substantial longer-term unemployment in downturns. Finally, rest unemployment also makes our model simultaneously consistent with procyclical occupational mobility of the unemployed, countercyclical job separations into unemployment and a negatively-sloped Beveridge curve.

English as a Global Language

How far has English already spread? How much further can we expect it to go? In response to the first question, this chapter tries to identify the areas of life where English already serves as a lingua franca in the world (more or less) and those where the language faces sharp competition and does not threaten to marginalize the other major languages. The former areas of life are international safety, the internal business of international organizations, internal communication within the international news industry, international sports and science. The latter areas are the press, television, the internet, publishing and international trade. As to the second question, about the future prospects of English, the chapter argues that the advance of English will depend heavily on the motives to learn the other major languages in the world as well. Based on the empirical evidence, the same model applies to the incentives to learn English and these other languages. On the important topic of welfare, the cultural market is the single one where it is arguable that the progress of English has gone too far. English dominance in the song, the cinema and the best-seller is indeed extraordinary and difficult to reconcile with the evidence popular attachments to home languages, which is otherwise strong and apparent.

Computing Markov-Perfect Optimal Policies in Business-Cycle Models

Time-inconsistency is an essential feature of many policy problems (Kydland and Prescott, 1977). This paper presents and compares three methods for computing Markov-perfect optimal policies in stochastic nonlinear business cycle models. The methods considered include value function iteration, generalized Euler-equations, and parameterized shadow prices. In the context of a business cycle model in which a scal authority chooses government spending and income taxation optimally, while lacking the ability to commit, we show that the solutions obtained using value function iteration and generalized Euler equations are somewhat more accurate than that obtained using parameterized shadow prices. Among these three methods, we show that value function iteration can be applied easily, even to environments that include a risk-sensitive scal authority and/or inequality constraints on government spending. We show that the risk-sensitive scal authority lowers government spending and income-taxation, reducing the disincentive households face to accumulate wealth.