SEMESTER 2 - SEMINAR 1 - Labour supply and employment smoothing Flashcards
1a…. [Hint: to find the labour supply, you need to set the FOC condition as in the lecture. Then, log-linearise and solve for e.]
1b….
C) Use your answer to B) to discuss a business cycle fluctuation
Business cycle fluctuations. In your answer you should try to be as specific and realistic as possible. You could source concrete examples from the news, explaining how a shock affects the economy. Provide description the shock (why it is positive/negative, why it can resemble a technological shock). Examples could include shocks coming from changes in labour market regulations/patenting system/environmental regulation/goods market competition
You should provide a full description of how the shock affects the economy starting from a simple explanation in words, and you should then move to diagrams and basic equations, such as the MPK and MPL and the Euler equations, as in the lectures and references given.
whats the background of the paper : Hermann Gartner, Thorsten Schank, Claus Schnabel (September 2012) The role of wage setting institutions on wage cyclicality: Some unexpected patterns from Germany.
– Suppose a decline in labour demand from Ld to Ld′ (see the
following figure).
– Rather than falling in response to the decline of Ld (point B), suppose the wage remains unchanged at its original level instead (point C).
– At this higher wage, labour supply exceeds labour demand.
– This means that many more workers would like jobs than they
cannot find.
– The failure of the wages to fall to clear labour market, leads to fall in employment.
whats the purpose of the study: Hermann Gartner, Thorsten Schank, Claus Schnabel (September 2012) The role of wage setting institutions on wage cyclicality: Some unexpected patterns from Germany.
– The study analyses the role of collective wage bargaining and works councils for wage adjustments during the business cycle in Germany.
– Authors focus on wage changes of employees working in the same plant in two consecutive years.
– The authors use changes in regional rates of unemployment, as indicators for the economic situation
– The period of observation is 1995 to 2004 and covers more than
one complete business cycle:
* The period 1995 to 1997 was one of economic weakness with rising unemployment.
* Between 1997 and 2001, due to the new economy boom, unemployment was falling.
* With the burst of the new economy bubble in 2001, unemployment started to rise again.
whats the main findings of the study : Hermann Gartner, Thorsten Schank, Claus Schnabel (September 2012) The role of wage setting institutions on wage cyclicality: Some unexpected patterns from Germany.
– The authors find that wage growth is higher when unemployment
is falling, and lower when unemployment is rising. 7
– More precisely, falling unemployment leads to a higher wage growth.
– However, interestingly, when unemployment rises, wage growth is only reduced, if wages are bargained at the sectoral or firm level.
– In contrast, only if wages are bargained individually, there is clear evidence for downward wage rigidity (i.e. wages do not react to changes in the rising unemployment rates).
– Therefore, the authors find downward wage rigidities, in the absence of collective bargaining.
– This contrasts with the Keynesian view that unions prevent wage cuts.
– In conclusion, the authors show that wage adjustments to positive and negative economic shocks, are generally not symmetrical, and that the degree of wage adjustment depends on whether or not a plant applies a collective bargaining agreement.
– It is sometimes believed that collective wage contracts in Germany lead to higher wage levels, but according to the authors’ findings, collective bargaining cannot be blamed for causing wage inflexibility during the business cycle.
whats the background of the study : Jelle Barkema, Tryggvi Gudmundsson, Mico Mrkaic (December 2020) Output gaps in practise: proceed with caution.
– The ongoing Covid-19 crisis has further highlighted the
importance of estimating economies’ growth potential.
– Challenges in measuring the relative falls in demand and supply coupled with the unusual nature of the pandemic induced downturn, further complicate estimates of slack which were difficult enough prior to the current crisis.
– One of the most common concepts for slack, is the output gap, which measures an economy’s current growth level relative to that of its potential.
– Output gap measures an economy’s current growth level relative to that of its potential.
– An accurate measurement of the output gap is thus crucial, as the amount of fiscal and monetary support required to get growth back to full capacity, will depend on the estimated amount of underutilized resources in the economy.
whats the main findings of the study: Jelle Barkema, Tryggvi Gudmundsson, Mico Mrkaic (December 2020) Output gaps in practise: proceed with caution.
– Using a sample of 197 countries over the period 1995-2018 we find a median real-time output gap of −0.7% and an average of −1%. That is to say, countries in the sample are on average assessed to be operating below their potential growth over this 23-year period.
What may be the reasons for the negative output gap? in Jelle Barkema, Tryggvi Gudmundsson, Mico Mrkaic (December 2020) Output gaps in practise: proceed with caution.
– Investment have been low following the financial crisis, and this
contributes to a lowering of potential.
– Total factor productivity growth has slowed considerably.
These 2 factors together explain the slowdown in potential GDP.
Next, the authors use text analysis techniques as well as manual text
analysis, to examine IMF Article IV Surveillance staff reports.
Their sample includes 2536 reports for 195 countries over the period 2000-2019. They collect basic statistics on the amount of coverage of the output gap and related concepts.
As the following figure shows, the discussions on the output gap have increased over time, with a notable spike after the Global Crisis.
Taylor rule and output gap.
whats the background of Anna Stansbury, Lawrence H. Summers (June 2020) Declining worker power versus rising monopoly power: Explaining recent macro trends
– Since the early 1980s, the US has seen a falling labour share and slow wage growth for typical workers, while measures of corporate valuations and measured mark-ups have increased.
– Remember: labour share is the part of national income allocated to labour.
– A number of papers have argued that increasing monopoly or monopsony power, can explain these trends.
– These authors argue instead that, the decline in worker power in the US economy, is a more compelling explanation for recent macro trends than a broad-based rise in monopoly power.
whats the 4 arguments in Anna Stansbury, Lawrence H. Summers (June 2020) Declining worker power versus rising monopoly power: Explaining recent macro trends
- A number of papers demonstrate that rising monopoly power could successfully explain the rise in corporate valuations and Tobin’s Q.
– These facts, however, can be equally well explained by the declining worker power hypothesis.
– Remember: Tobin’s q is the ratio of the stock market value of a firm to the value of its capital stock.
– As worker power declines, the firm’s pure profits are redistributed from labour to capital owners, meaning that the labour share declines, corporate profitability rises, and Tobin’s q rises (as the expected value of future capital income increases). - The decline in worker power over the last four decades can explain trends in the labour share, Q, and corporate profitability.
– From 1982-2016, labour rents have declined substantially: from 12% of net value added in the US non-financial corporate sector in the early 1980s, to 6% in the 2010s (see the figure below).
– The authors argue that this decline in labour rents is big enough to explain the entire decline in the labour share in the non-financial corporate sector (see the following figure).
9 - The decline in worker power is more consistent with another important macroeconomic trend of recent decades, the decline in the NAIRU.
– Non-Accelerating Inflation Rate of Unemployment is the rate of unemployment required to keep the inflation rate constant.
– A fall in worker power would lead to a fall in the NAIRU, as firms’ cost of hiring declines. Indeed, consistent with this hypothesis, states and industries with larger falls in labour rents over 1984- 2016, had larger falls in unemployment. - There is a large body of direct evidence that there has been a broad-based decline in worker power in the US.
– The declining worker power hypothesis builds on the work of a generation of labour economists. Industrial organisation economists are, however, typically less convinced by arguments that there has been a broad-based increase in monopoly power.
