The Economic Journal
published version, working paper version
During the Covid-19 crisis, most OECD countries used short-time work (subsidised reductions in working hours) to preserve employment. This paper documents that short-time work affects the behaviour of firms (supply) and households (demand). First, using household survey data from Germany, we show that the consumption risk of short-time work is lower than that of unemployment. Second, we construct a New Keynesian model with heterogeneous workers and firms, incomplete asset markets, and labour market frictions. Short-time work weakens workers’ precautionary savings motive and lowers labour costs. This reduces the level and volatility of both the separation and unemployment rate at the cost of tying workers to less productive firms. Quantitatively, the positive employment effects dominate the productivity losses.
This paper studies wage behavior in Europe using EU-SILC panel data. Real wages in Europe overall show a strongly procyclical reaction to unemployment. By contrast, real wages are often found to be acyclical in aggregate data, but this is largely due to composition effects. Composition effects are cyclical variations in the labor force, which can bias aggregate wage series in a countercyclical manner. The estimated elasticities of wage growth to increases in unemployment range from −1.3% to −1.6%, depending on the measure of wages used. I also find considerable differences in wage cyclicality across countries. In particular, wages are more procyclical in newer member states compared to the EU15, especially so in Eastern European countries and Baltic countries. I find no evidence that wages in the European periphery were more rigid compared to the core. Furthermore, I find asymmetric adjustment of nominal wages during the business cycle, indicative of downward nominal wage rigidity. This holds for the periphery as well as the rest of the EU. Lastly, the wage rigidity estimates are correlated with the bargaining coverage rate and the degree of corporatism.
What is the importance of macroeconomic shocks for the evolution of inequality in the Euro Area? To answer this question, we estimate a HANK model for the euro area based on the framework by Bayer, Born, and Luetticke (2022), which combines aggregate frictions a la Smets and Wouters (2007) with incomplete markets and portfolio choice between liquid and illiquid assets. We use this model to find out which macroeconomic shocks drive our measures of inequality, which are the shares of wealth and income held by the top 10 percent of European households, and find that technology shocks and demand shocks drive the evolution of wealth inequality. In contrast, income inequality is driven by price markup and technology shocks. Lastly, demand shocks are more important for the evolution of wealth inequality in the eurozone than in the US.