WS 2006/07 1 U. van SuntumKonjunktur und Beschäftigung 10. Wages and Employment Neoclassical...

WS 2006/07 1 U. van Suntum Konjunktur und Beschäftigung

10. Wages and Employment

• Neoclassical theory: rise in real wage without productivity increase => Employment declines

• Purchasing power argument => rise in wages generates new commodity demand

Literature:

Ulrich van Suntum, Kaufkrafttheorie des Lohnes, in:Das Wirtschaftsstudium (wisu) 26.Jg (1997), S. 71-77...

G. Dieckheuer, Makroökonomik, Kap. 7.6.4.

U van Suntum, Lecture KuB 1

WS 2006/07 2 U. van Suntum Konjunktur und Beschäftigung

Neoclassical theory of employment

p

w

0

max!);( :firms

N

Y

wN

Yp

N

G

iKwNKNpYG

KuB 8.1 2U van Suntum, Lecture KuB 2

WS 2006/07 3 U. van Suntum Konjunktur und Beschäftigung

0

0

max!)();();(

)(

N p

w Y :2 constraint

hrs/day) 24 (N :1 constraint

max!);( :(workers) sm

p

w

F

U

F

LY

U

Y

L

p

wFNYFYUFYL

p

wFNY

NNF

FYUhousehold

m

m

m

p

w

U

U

YU

FU

pw

FU

Y

U

Y

F

/

/

/

/

U van Suntum, Lecture KuB 3

WS 2006/07 4 U. van Suntum Konjunktur und Beschäftigung

Labor supply curve

=> Higher wage may lead to declining labor supply

Demand for leisure as a function of real wage rate

U van Suntum, Lecture KuB 4

WS 2006/07 5 U. van Suntum Konjunktur und Beschäftigung KuB 8.1 5

Labor market equilibrium in neoclassical theory

U van Suntum, Lecture KuB 5

WS 2006/07 6 U. van Suntum Konjunktur und Beschäftigung

Reasons for unemployment

temporary• Business cycle• Season (e.g. construction industry)• [technological progress]*)

• [external shocks (oil crisis, earth quake] *)

persisting• frictions • mismatch • Lack of capital• minimum wages

natural rate of unemployment

*) controversal

U van Suntum, Lecture KuB 6

WS 2006/07 7 U. van Suntum

Labor demand Labor supply

Example: lack of capital

N

w/p

employed unemployed

Subsistance-level

U van Suntum, Lecture KuB 7

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Labor demandLabor supply

Example: minimum wage

N

w/p

employed unemployed

official wage

U van Suntum, Lecture KuB 8

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Labor demandLabor supply

Example: business cycle induced unemployment

N

w/p

employed unemployed

Official wage

U van Suntum, Lecture KuB 9

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Mismatch and the Beveridge-Kurve

Unemployment rate

vacancies rate(open jobs/working population)

45o

• move on the curve: business cycle• shift of the curve: mismatch

U van Suntum, Lecture KuB 10

WS 2006/07 11 U. van SuntumU van Suntum, Lecture KuB 11

Source: SVR, Expertise „Herausforderungen des demografischen Wandels, 2011, p. 100

WS 2006/07 12 U. van Suntum

Indices of wage policy (I) (see SVR, Jahresgutachten 2002/04, Anhang IV)

1. Wage share: LQ = W/Y

2. Adjusted wage share: LQber = W/Y *E/N

E1991/N1991

(E = active population = employed N + self-employed S)

3. Share of income from working: AEQ = W/Y * E/N

AEQ = (W/N) * E

Y=

w * E

Y

W = wages wNY = nominal income

=W * E

N * Y

(W/Y)const => [(wN)/Y]const => [w/(Y/N)]const

U van Suntum, Lecture KuB 12Arbeitseinkommensquote SVR.xls

WS 2006/07 13 U. van Suntum

4. nominal labor unit costs

5. real labor unit costs:

NGDP

w

GDP

wN

GDP

WLSK

realrealrealnom /

NGDP

pw

pGDP

wN

GDP

WLSK

realrealreal /

/

*

• Wage share (W/Y) related to distributional issues• Labor unit costs related to competitiveness• nominal labor unit costs closely related to inflation• Real labor costs more related to employment issues

Indices of wage policy (II) (see U. Van Suntum, Löhne, Wechselkurse und Beschäftigung. Zur Aussagekraft von Lohnstückkosten und realen Wechselkursen als Beurteilungsmaßstab für die nationale Lohnpolitik. Zeitschrift für Wirtschaftspolitik, 46. Jg. (1997), S. 23-50)

U van Suntum, Lecture KuB 13Lohnstückkosten SVR empirisch.xls

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Neoclassical production function

A

N

1KaNY

11KNaN

YNd

p

w

N*U van Suntum, Lecture KuB 14

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N*

Technological progress or rising capital intensity:

=> Either rise in wages or in employment

N

Np

w

U van Suntum, Lecture KuB 15

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Wage increase without technological progress

Np

w

• spurious productivity increase: move at the Nd-curve• genuine productivity increase: shift of Nd -curve

SVR : wage rise only with genuine productivity increase and only with full-employment in the initial situation

U van Suntum, Vorlesung KuB 16

WS 2006/07 17 U. van Suntum Konjunktur und Beschäftigung

Why do wages deviate from equilibrium level?

Insider-Outsider-approach: •unions maximize utility of insiders•transactions costs lead to wage gap in favor of insiders•Outsiders lose both motivation and abilities

Efficiency wages•Reduce shirking (Shapiro/Stiglitz 1984)•Increase costs of being sacked (Salo 1979, Schlicht 1978) •Tighten commitment to firm (Akerlof 1982)

U van Suntum, Lecture KuB 17

WS 2006/07 18 U. van Suntum Konjunktur und Beschäftigung

Why unions enforce wages above equilibrium levelSee T. Apolte, Th. (2004), Arbeitsmarktökonomik, in: Th. Apolte u.a., Vahlens Kompendiumder Wirtschaftstheorie und Wirtschaftspolitik, Bd. 2, 9. A., München 2005

KuB 8.1 18

TRNN

TRYE

p

w

TRN

NN

p

w

N

NYE

sd

s

ds

s

d

)(

)(

Unions maximize expected value of worker`s income:

=> Indifference curve: employment vs. wage rate:

U van Suntum, Lecture KuB 18

WS 2006/07 19 U. van Suntum

Max E(Y) s.t. labor demand curve:

dbNp

w

b

pwpw

max

maxd

p

w

)/()/(N

(w/p)max = prohibitive wage; b < 0

b

pw

TR

N

Nb

N

TRpw

N

YE

TRN

NNbN

p

w

N

NYE

S

d

Sd

S

dSd

S

d

2N 02

)(

max!)(

max*dmax

max

• dN*/dTR < 0 • dE*(Y)/dTR > 0• dN*/dNs = 0 • dE*(Y)/dNs < 0

U van Suntum, Lecture KuB 19

WS 2006/07 20 U. van Suntum

=> voluntary acceptance of unemployment AL by unions:

full employment

U van Suntum, Lecture KuB 20

WS 2006/07 21 U. van Suntum Konjunktur und Beschäftigung

Rising TR increases E(Y)* but decreases N*

w/p

N

Labor Demand

Originally highest achievable indifference curve (e.g. E =100)

New indifference curve E(Y) = 100 (after rise in TR)

new highest achievable indifference curveE(Y) > 100 (after rise in TR)

Ns

U van Suntum, Lecture KuB 21

WS 2006/07 22 U. van Suntum

Rising labor demand increases E(Y)*,N* and (w/p)

w/p

N

Labor demand

Ns

Wage setting curve LS

U van Suntum, Lecture KuB 22

WS 2006/07 23 U. van Suntum Konjunktur und Beschäftigung

=> Rising labor supply decreases E(Y)but does not change N* and w/p

w/p

N

labor demand

Originally highest achievable Indifference curve E(Y) = 100

Ns

New indifference curve E(Y) = 100no longer achievable

New highest achievableIndifference curveE(Y) < 100

U van Suntum, Lecture KuB 23

WS 2006/07 24 U. van Suntum

*) see also Apolte, Th. (2004), Arbeitsmarktökonomik, in: Th. Apolte u.a., Vahlens Kompendiumder Wirtschaftstheorie und Wirtschaftspolitik, Bd. 2, 9. A., München 2005

Wage differential in favour of insiders:*)

OOIIOIOI dNKdNKNNwNNpXG )()();(

Dismissal costs

Recruiting costs

U van Suntum, Lecture KuB 24

WS 2006/07 25 U. van Suntum Konjunktur und Beschäftigung

Profit maximization requires:

OO

O

II

I

KN

xpw

KN

xpw

With equal productivity we have:

OIOI KKww

U van Suntum, Lecture KuB 25

WS 2006/07 26 U. van Suntum Konjunktur und Beschäftigung

N*

Persistence of Unemployment

N*

wI

wI

• Negative demand shock leads to dismissals• Recovery leads to rising wages of insiders

U van Suntum, Lecture KuB 26

WS 2006/07 27 U. van Suntum Konjunktur und Beschäftigung

Minimum wages and unemployment benefits(Source: UvS, Die unsichtbare Hand, 4th. dd. Berlin 2011)

Poverty trap outsiders employed

productivity

fixed wage

unemployment benefit

Employed in ascendingorder of productivity

U van Suntum, Lecture KuB 27

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Purchasing power theory of wages

(see U. van Suntum, Kaufkrafttheorie des Lohnes.In: Das Wirtschaftsstudium, 26.Jg.(1997)1, S. 71-78)

• Rise in wages comes at expense of profits • However, saving rate of workers is lower • Does this also increase labor demand?

U van Suntum, Lecture KuB 28

WS 2006/07 29 U. van Suntum 29

Sparquoten 1998 nach der Einkommenshöhe

-20%

-10%

0%

10%

20%

30%

40%

1.800 2.500 3.000 4.000 5.000 7.000 10.000 35.000

Einkommen in DM

Früheres Bundesgebiet Neue Länder und Berlin-Ost

Suppose a Kaldorian saving function (N. Kaldor, Review of Economic Research 1956/57):

0 < sw < sQ < 1

U van Suntum, Lecture KuB 29

WS 2006/07 30 U. van Suntum 30

Y

Qs

Y

wNss

QswNssYS

Qw

Qw

• Average saving rate is sum of class-rates, weighted by their income share

• Redistribution in favor of class with lower saving rate increases consumption

Y

Q

0 1

s

sw

sQ

U van Suntum, Lecture KuB 30

WS 2006/07 31

Lower saving rate rotates IS-curve counterclockwise

i

Y

S

I

I = I(i)

S = soY

Iplanned = Splanned

IS-curveII

IVIII

I

S = s1Y

U van Suntum, Lecture KuB 31

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Scenario I: Keynesian Rationing

i

p

Yreal

Yreal

LM

IS(w0)

N

w/pYs(w0)

Ns

Nd

Y v

w0

Yreal(N)

The purchasing power mechanism works, but could be substituted by fiscal policy

w1

IS(w1)

Yd

w/p*

Ys

U van Suntum, Lecture KuB 32

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Scenario II: Neoclassical unemployment

i

p

Yreal

Yreal

LM(p0)

IS(w0)

N

w/p

Ys(w0)

Ns

NdY v

w0

Yreal(N)

The purchasing power mechanism worsens the problem

w1

IS(w1)

Yd

LM(p1)

Ys(w1)

U van Suntum, Lecture KuB 33

p0

p1

WS 2006/07 34

Lohnzurückhaltung und Erwerbstätigenzuwachs im internationalen Vergleich

CHESWE

JPN

BEL

DEU

FRA

DNK

GBR

AUT

ITA

GRC

USA

NLD

CAN

NOR

AUS

ESP

IRLR2 = 0,8836

-0,50

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

0,00 1,00 2,00 3,00 4,00 5,00 6,00 7,00

Lohnzurückhaltung

Erw

erb

stät

igen

zuw

ach

s

Konjunkturstützung durch höhere Löhne? „Kaufkrafttheorie der Löhne“

empirisch nicht bestätigt

© U.van Suntum, CAWM

WS 2006/07 35

Empirie in Deutschland widerspricht Kaufkrafttheorie der Löhne

© U.van Suntum, CAWM

WS 2006/07 36

Criticism of the purchasing power theorem

Model:

• rationing does not restrict expansion of a single firm

• dY/dN > w/p => strong incentives to increase investment and output

• lack of demand in open economy?

Policy:

• strategy is risky (change to neoclassical unemployment)

• stimulus of investment would increase commodity supply as well

• empirical evidence does not support the theory

U van Suntum, Lecture KuB 36

WS 2006/07 37 U. van Suntum

Lerning goals/questions• What are possible reasons for unemployment?

• What is the Beveridge curve?

• Explain the difference between genuine and spurious productivity growth

• What are efficiency wages?

• Explain the insider-outsider-problem

• Explain the purchasing power theory of wages

• Which important indices of wage policy do you know?

U van Suntum, Lecture KuB 37