Unemployment empirics Flashcards
Diamond Critique
Diamond 1971: Why w>wr?
Heterogenous workers
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
Heterogenous workers solves Diamond?
Info gathering costs (Manning, 2003): Thus cheaper / optimal to just offer w>wr.
w>wr to encourage remaining in job? Extend Mccall to have (endogenous) job termination
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)
Efficiency wages
Shapiro, Stiglitz (1984) and Summers (1988): Unemployment is a function of effort function and b (Fear of Ue)
Shapiro Stiglitz validity tests:
effort
Cappelli and Chauvin, 1991
dele/delw >0. Effort up (lower dismissals) as outside option worse (given same w and discipline for United Auto Workers)
Shapiro Stiglitz validity tests:
monitoring
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
Shapiro Stiglitz: Extent?
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?!
Phillip’s curve original
Anchored (Lipsey, 1960)
Impact of changes to b on wr
Addison et al 2010: b down 10% has a 1-4% impact on wr in support of Mccall
Wages in metropolitan vs rural areas
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
Support for NAIRU?
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)
Implications of having a catch all term in NAIRU
Indicates we should consider ‘structural’, not ‘natural’ (Phelps). Union premium of up to 22% US (Gabriel and Schmitz, 2014)
Define NRU
Walrasian general eqm given structural characteristics (Friedman)
De-anchor to adaptive?
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
Deflation and Phillip’s curve
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
Wage indexation
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
Hysteresis evidence?
Great Depression: Inertia in UE (Hatton and Boyer, 2002)
Insider Outsider evidence?
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
Skill Atrophy
‘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
Capital Scrapping
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!
Job finding and destruction rate UK 2000s
Smith, 2011: 10% / 0.5%. per month
Reiss (2022)
‘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
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Europe: labour market institutions
Nickel, 1997: High Ue due to: Generous b, high overall taxes, collective bargaining (unions), poor educ outcomes for poorest
