Unemployment empirics

Question 1

Diamond Critique

Answer 1

Diamond 1971: Why w>wr?

Question 2

Heterogenous workers

Answer 2

Rothschild (1973).
Skills: Rosen (1986) ‘economics of superstars’: Great variation in skills (outside options)
Gender: Caliendo et al 2014): Differences in wr sufficient to explain UK gender wage gap

Question 3

Heterogenous workers solves Diamond?

Answer 3

Info gathering costs (Manning, 2003): Thus cheaper / optimal to just offer w>wr.

Question 4

w>wr to encourage remaining in job? Extend Mccall to have (endogenous) job termination

Answer 4

Simple Mccall predicts E(w)=1.05wmin, but in fact 1.8wmin (Horenstein et al, 2011).
Lifetime for jobs is poor assumption as only 30-35% of jobs held for a decade (Hobjin and Sahin, 2007)

Question 5

Efficiency wages

Answer 5

Shapiro, Stiglitz (1984) and Summers (1988): Unemployment is a function of effort function and b (Fear of Ue)

Question 6

Shapiro Stiglitz validity tests:
effort

Answer 6

Cappelli and Chauvin, 1991
dele/delw >0. Effort up (lower dismissals) as outside option worse (given same w and discipline for United Auto Workers)

Question 7

Shapiro Stiglitz validity tests:
monitoring

Answer 7

Kruger, 1991: Higher wages and steeper wage profile at company owned stores (lower monitoring).
Kruse (1992): Daily vs weekly leads to 1-2% lower pay!
Wages and monitoring ARE substitutes

Question 8

Shapiro Stiglitz: Extent?

Answer 8

Nickell et al, 2005: High b explains 20% of EU Ue in 1960s to 1980s.
Malcolmson and Mavroeidis (2007): Ue due to efficiency wages 98% of UK Ue?!

Question 9

Phillip’s curve original

Answer 9

Anchored (Lipsey, 1960)

Question 10

Impact of changes to b on wr

Answer 10

Addison et al 2010: b down 10% has a 1-4% impact on wr in support of Mccall

Question 11

Wages in metropolitan vs rural areas

Answer 11

Glaeser and Marc, 2001: Higher in metropolitan: Greater outside options so Ls can be more elastic to wage and must have higher wages s.t. discipline is as strong

Question 12

Support for NAIRU?

Answer 12

Gordon 1997: Coefficients of lagged inflation sum to 1 in determining inflation today so there is a natural rate which is NAIRU (Which leads to inflation = weighted avg of past (form of adaptive))
But only a small part of UE is fricitonal (MM, 2007)

Question 13

Implications of having a catch all term in NAIRU

Answer 13

Indicates we should consider ‘structural’, not ‘natural’ (Phelps). Union premium of up to 22% US (Gabriel and Schmitz, 2014)

Question 14

Define NRU

Answer 14

Walrasian general eqm given structural characteristics (Friedman)

Question 15

De-anchor to adaptive?

Answer 15

De-anchoring with stagflation (Nickansen, 2002): Inflation is largely a modern phenomenon (Friedman)
Hey 1994: Almost all follow adaptive not rational in lab
Stiglitz 1997: Support for use of adaptive curve 1960-71

Question 16

Deflation and Phillip’s curve

Answer 16

Breakdown as down sticky wages (Pedro in Portugal).
Ball and Mazunder (2011): Relationship of Ue and change in inflation depends on inflation (so not linear!!). This paper also suggests ratex Phillip’s curve performs poorly 2008-2011

Question 17

Wage indexation

Answer 17

Likely in a high inflation economy (reducing uncertainty) to set in real terms: Ue more sensitive to inflation.
Derive by subbing in pi e = api+(1-a)pi e

Question 18

Hysteresis evidence?

Answer 18

Great Depression: Inertia in UE (Hatton and Boyer, 2002)

Question 19

Insider Outsider evidence?

Answer 19

Blanchard and Summers (1986)
Outsiders can’t produce downward pressure on wage - Coe (1990): Aggregate Ue up has little effect restraining wages
- Crafts (1989) - Proportion LT UE significant in predicting wage changes
- Alogoskoufis (1995): Higher labour turnover costs: Lower exit rates from UE.
Crucial as labour turnover costs are a cause of being an outsider

Question 20

Skill Atrophy

Answer 20

‘forgetting by not doing’ (Collier and Duponchel, 2012): Sierra Leone
- Crafts (1987): Duration dependent UE in interwar period.
- Hughes and Mccormick, 1980: Search intensity down when UE for a longer period

Question 21

Capital Scrapping

Answer 21

Demand shock leads to K down (takes time to recover)
- Bean, 1994: By 1987, capital 22% below trend UK / Prize and Bean 1990: Ue due to capacity shortages up in 1990s
- Rowthorn, 1999: Elasticity of sub of capital / labour is less than 0.5 80% of time so change in level of capital will change eqm Ue rate. Generally, tend to not be very substitutable!

Question 22

Job finding and destruction rate UK 2000s

Answer 22

Smith, 2011: 10% / 0.5%. per month

Question 23

Reiss (2022)

Answer 23

‘MP became too used to a state of affairs post COVID and took too long to adjust’
- Shocks to supply/ energy price shocks in 2021 were misinterpreted as transitory.
- Financial markets show rise in expected inflation and Variance of inflation expectations indicating lower credibility. CB over-relied on credibility that E(inflation) would stay anchored
-

Question 24

Europe: labour market institutions

Answer 24

Nickel, 1997: High Ue due to: Generous b, high overall taxes, collective bargaining (unions), poor educ outcomes for poorest

Question 25

Changes in institutions

Answer 25

Nickel et al 2005: More econometrically robust: 55% of rise in European unemployment in 1990s due to evolution in institutions.

Question 26

Interactions of institutions and shocks

Answer 26

Blanchard 2004/6:
Firms must internalise externality of laying off workers / NIT rather than min wage etc
Hartz reforms in Germany consistent with this and have been credited with creating 2.5m jobs

Question 27

How may imperfect info on rw lead to different offers

Answer 27

Rothschild 1973:
Different info leads to different solutions to max E(profit)