How important is imperfect competition in the product market for employment dynamics? To investigate this, we formulate a model of employment adjustment with search frictions, vacancy costs, hiring costs, and imperfect competition in the product market. From this model, we derive a structural equation for employment that we estimate on firm-level data. We find that product market demand shocks have significant and quantitatively large effects on employment. This supports a model with imperfect competition in the product market. We find no evidence that the level of unemployment in the local labour market has a direct effect on job creation in existing firms. In some specifications, we find evidence of congestion effects, i.e., that hiring is slowed down if there are many vacancies in the local labour market.
Although search-matching theory has come to dominate labor economics in recent years, few attempts have been made to compare the empirical relevance of search-matching theory to efficiency wage and bargaining theories, where employment is determined by labor demand. In this paper we formulate an empirical equation for net job creation, which encompasses search-matching theory and a standard labor demand model. Estimation on firm-level data yields support for the labor demand model, wages and product demand affect job creation, but we find no evidence that unemployed workers contribute to job creation, as predicted by search-matching theory.
We formulate an efficiency wage model with on-the-job search where wages depend on turnover and employers may use information on whether the searching worker is employed or unemployed as a hiring criterion. We show theoretically that such ranking of job applicants by employment status raises both the level and the persistence of unemployment and numerically that the effects may be substantial. More prevalent ranking in Europe compared to the US (because of more rigid wage structures etc.) could potentially help to explain the high and persistent unemployment in Europe.
According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product market conditions together determine wages. A wage equation is derived and estimated on aggregate data for the Nordic countries. Wages are found to depend on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.
According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product-market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product-market conditions together determine wages. A wage equation is derived and estimated on aggregate data for four Nordic countries. Wages are found to depend not only on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.
Cooper's paper reviews some current research directions in macroeconomics. The paper made me worried about the state of macroeconomic research and my comments below consist of some critical remarks on the methodological approach in the literature reviewe
Cooper's paper reviews some current research directions in macroeconomics. The paper made me worried about the state of macroeconomic research and my comments below consist of some critical remarks on the methodological approach in the literature reviewed in the paper.
While the consequences of nominal wage contracts have been rather thoroughly analyzed, there is no generally accepted theory of why such contracts prevail. In this paper I argue that the distinction between insiders and outsiders is important for understanding nominal wage contracts. Since most employment fluctuations take the form of fluctuations in hiring, insiders are normally not affected by them. Since prices are primarily determined by costs, demand shocks have small effects on real wages. Thus insiders have little incentive to change to more complicated contracts. With rigid nominal wages, nominal demand shocks have large effects on the employment opportunities of outsiders, but outsiders have little influence on labor contracts.
A structural dynamic model of price and quantity adjustment is estimated on time series data for exports and export prices, Two sources of dynamics are considered: customer markets and preset prices. As predicted by the customer market model, the market share adjusts slowly after a change in the relative price and Financial conditions affect prices, Prices are found to be sticky in the sense that they do not reflect the most recent information about costs and exchange rates. A parsimoniously parameterized structural model explains about 90% of the variation in market share and the relative price.
Att ha samma ränta som övriga länder i EMU och samma växelkurs mot länder utanför EMU kan vara problematiskt om utvecklingen i Sverige skiljer sig starkt från den i valutaunionen som helhet. Att problemet med ”asymmetriska chocker” inte är något hjärnspöke visas av vad som hänt i Irland och Tyskland under EMU: s första år.
Euro notes and coins are now being introduced in 12 countries in Europe, but Sweden is not among them. The decision to keep Sweden out of the EU’s Economic and Monetary Union was taken by the Riksdag (Swedish parliament) in December 1997. The aim of this article is to provide some insight into the public debate that led to the Swedish decision and also to describe something of what has happened since. The emphasis is on the economic issues but the political aspects of the matter are also discussed. To a great extent, of course, EMU is a political project. The question of Swedish membership is expected to be the subject of a national referendum in 2003.
Jobs in the primary sector require firm-specific training, with wages determined as a result of bargaining. Firms pay for the training and since they are imperfectly informed about worker productivity, they test workers before hiring them. The secondary sector is competitive. Taking a job in the secondary sector signals low productivity, and therefore workers in the secondary sector are unable to get jobs in the primary sector. Open unemployment coexists with unfilled vacancies for low wage jobs.
Combining micro and macro data, we construct demand-side shocks, which we take to be exogenous for individual firms. We estimate a reduced-form model to describe how firms adjust their production, employment, capital stock, and inventories in response to such shocks. Then, we chose the structural parameters of a theoretical model so that the theoretical model can match the impulse-response functions from the estimated reduced-form model. Firms’ reactions to demand-side shocks are well explained by a model where firms have modest market power, face convex adjustment costs and where they can vary utilization flexibly. The stock-out motive helps to explain inventory dynamics.
A contract between a risk-neutral firm and its risk-average workers is considered under uncertainty about product demand. We show that profit sharing can be used to attain the efficient level of employment and, at the same time, preserve optimal risk sharing between the parties. Optimal profit sharing does not imply wage variability; instead, wages are stabilized across states.
Recent studies of wage bargaining and unemployment have emphasized the distinction between insiders and outsiders, and that unions act in the interest of insiders. Yet it is typically assumed that insiders and recently hired outsiders are paid the same wage. We consider a model where the starting wage may differ from the insider wage, but incentive constraints associated with turnover affect the form of the contract. We examine under what conditions the starting wage is linked to the insider wage so that increased bargaining power of insiders raises the starting wage and reduces the hiring of outsiders.
We examine the matching process using monthly panel data for local labour markets in Sweden. We find that an increase in the number of vacancies has a very weak effect on the number of unemployed workers being hired: unemployed workers appear to be unable to compete for many available jobs. Vacancies are filled quickly and there is no (or only weak) evidence that high unemployment makes it easier to fill vacancies; hiring appears to be determined by labour demand while frictions and labour supply play small roles. These results indicate persistent mismatch in the Swedish labour market.
We consider an efficiency wage model where wages affect turnover and firms choose optimal labor contracts under uncertainty about demand and productivity. We show that there may be an equilibrium with nominal wage contracts where monetary shocks affect output. Furthermore, monetary shocks have persistent effects on output because the previous state of the labor market affects the reemployment probability of quitting workers. Persistence increases if workers have bargaining power. With endogenous policy, a credibility problem arises naturally in the model. Equilibrium inflation increases with persistence but decreases with the natural rate of unemployment for given persistence.
We construct a model of a firm competing for market share in a customer market and making investments in physical capital. The firm is financially constrained and there are implementation lags in investment. Our model predicts that product prices should depend on costs and competitors' prices but respond weakly to demand shocks. Also, prices should be strongly related to investment. We estimate price and investment equations on panel data for Swedish manufacturing plants and find results that are qualitatively in line with these predictions, though the relation between investment and prices is stronger than predicted by our model.