SUMMARY OF MY RESEACH ON WAGES AND UNEMPLOYMENT HERE
Wage Formation and the Persistence of Unemployment (with Henrik Horn), Economic Journal 97, 877-884, 1987.
(Reprinted in Bénassy, J. (ed.) Macroeconomics and Imperfect Competition, Edward Elgar, 1995)
One of the most pressing economic problems in Europe today is unemployment. The source of the European unemployment problem is a matter of controversy. The unemployment is sometimes claimed to be of a 'Keynesian' nature, being due to deficient aggregate demand. The other main argument suggests that the unemployment is of a 'classical' kind. Excessive real wages are then often said to result from trade unions' influence on wage setting. The main idea is that inherent in the wage formation process there is a tendency for unemployment, once created, to persist. The present unemployment may originally have arisen for Keynesian reasons, but once unemployment is created it will change the conditions under which wages are formed, thus persisting in a classical form. More specifically, we want to show how unemployment, caused by a combination of short run wage stickiness and a temporary contractionary demand shock, may persist after wage contracts have been renegotiated. The formulation of the model is inspired by three, in our view characteristic features of many European economies. First, trade unions play decisive roles in wage formation. Second, labour contracts specify more or less state-independent nominal wages, leaving employment decisions to the discretion of employers. Third, employed workers are very rarely exchanged for unemployed workers. This may be the consequence of negotiated or legislated seniority systems. It may also be due to various kinds of turn-over costs.
The Persistence of Unemployment in a Dynamic Insider-Outsider Model (with Allan Drazen),
in Weiss, Yoram and Gideon Fishelson, ed., Advances in the Theory and Measurement of Unemployment (London: MacMillan), 1990.
Insiders, Outsiders, and Nominal Wage Contracts, Journal of Political Economy 100, 252-270, 1992.
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.
Seniority Rules and the Persistence of Unemployment (with Allan Drazen), Oxford Economic Papers 46, 228-244, 1994.
We formulate a stochastic infinite-horizon insider-outsider model that is solved explicitly and used to investigate the consequences of alternative `seniority' rules for wage and employment determination. The model is simple enough to allow analysis of several different institutional setups. Persistence (but not hysteresis) arises when employment affects the layoff and hiring priority of workers and their relative influence on union decisions. Persistence can arise both when layoffs are random and when there is a strict layoff order. Expected employment depends not only on employment in the previous period, but on a longer history of shocks.
Discrimination and Open Unemployment in a Segmented Labour Market (with Barry McCormick), European Economic Review 39, 1-15, 1995.
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.
Profit Sharing, Employment Efficiency and Wage Stability (with Tomas Sjöström), Scandinavian Journal of Economics 97, 281-294, 1995
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.
Nominal Wage Contracts and the Persistent Effects of Monetary Policy (with Andreas Westermark),
European Economic Review 42, 207-233, 1998.
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.
Insider Bargaining Power, Starting Wages, and Involuntary Unemployment (with Tomas Sjöström),
Scandinavian Journal of Economics 102, 669-688, 2000.
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.
Ranking of Job Applicants, On-the-job Search and Persistent Unemployment (with Stefan Eriksson), Labour Economics 12, 407-428, 2005.
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.
Prices, Productivity, and Wage Bargaining in Open Economies (with Anders Forslund and Andreas Westermark),
Scandinavian Journal of Economics 110, 169-195, 2008
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.
Product Market Imperfections and Employment Dynamics (with Mikael Carlsson and Stefan Eriksson),
Oxford Economic Papers 65, 447-470, 2013.
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.
MATCHING AND THE BEVERIDGE CURVE: A REINTERPRETATION (with Karolina Stadin) NEW VERSION December 2023
We show that the Beveridge has been fundamentally misunderstood in the literature. There are few vacancies when unemployment is high, but it is not because vacancies are filled quickly as the textbook search-matching model suggests. Instead, it is because fewer employed workers find new jobs in periods of high unemployment leading to a low inflow of new vacancies. Vacancies are filled at roughly the same rate independent of the state of the labor market. In this new version of the paper we estimate the alternative model and show that it can explain the Beveridge curve without search frictions. DATA
Referee comments 2021 and responses here
Referee comments 2023 and responses here: R1 R2 Response