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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
WS 2006/07 8 U. van Suntum
Labor demandLabor supply
Example: minimum wage
N
w/p
employed unemployed
official wage
U van Suntum, Lecture KuB 8
WS 2006/07 9 U. van Suntum
Labor demandLabor supply
Example: business cycle induced unemployment
N
w/p
employed unemployed
Official wage
U van Suntum, Lecture KuB 9
WS 2006/07 10 U. van Suntum
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
WS 2006/07 14 U. van Suntum
Neoclassical production function
A
N
1KaNY
11KNaN
YNd
p
w
N*U van Suntum, Lecture KuB 14
WS 2006/07 15 U. van Suntum
N*
Technological progress or rising capital intensity:
=> Either rise in wages or in employment
N
Np
w
U van Suntum, Lecture KuB 15
WS 2006/07 16 U. van Suntum
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
WS 2006/07 28 U. van Suntum 28
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
WS 2006/07 32
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
WS 2006/07 33
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