Dynamism and Inertia on the Russian Labour Market: A Model of Segmentation

This paper proposes an explanation of the puzzling coexistence of elements of inertia and dynamism on the Russian labour market using a segmentation model. Risk averse workers are differentiated according to their productivity. They face a trade-off between wages and access to social services provided by the firm. The most productive workers leave their initial firm, contract on the spot labour market, and concentrate in the best performing firms. The model provides a possible interpretation of wage arrears which can be viewed as an element of an implicit contract between firms and less productive workers. We test some of the predictions of the model using a panel dataset containing 13,410 firms, for 1993 - 1997.http://deepblue.lib.umich.edu/bitstream/2027.42/39632/3/wp246.pd

Future EMU Membership and Wage Flexibility in Selected EU Candidate Countries

This paper attempts to evaluate wage rigidity related to risks of increased size and volatility of unemployment after the candidate countries enter the EMU. Such evaluation is done through the study of past labour market adjustment mechanisms and, in particular, the role played by the exchange rate movements and independent monetary policy. The paper examines some institutional and structural characteristics of candidate countries labour markets that could influence the wage elasticity. The analysis indicates that generally nominal wages are not flexible in candidate countries. Inflationary surprises and nominal exchange rate movements have an effect on the adjustment, especially during the Russian crisis. On the other hand fast productivity growth creates the environment in which unit labour can adjust to unfavourable labour market outcomes through moderation of real wage dynamics despite nominal stickiness. The paper indicates possible fields of further in-depth research in this area.labour market, unemployment, European Monetary Union, EU enlargement, EMU enlargement, wage flexibility

The Determination of Wages of Newly Hired Employees: Survey Evidence on Internal versus External Factors

This paper uses information from a rich firm-level survey on wage and price-setting procedures, in around 15,000 firms in 15 European Union countries, to investigate the relative importance of internal versus external factors in the setting of wages of newly hired workers. The evidence suggests that external labour market conditions are less important than internal pay structures in determining hiring pay, with internal pay structures binding even more often when there is labour market slack. When explaining their choice firms allude to fairness considerations and the need to prevent a potential negative impact on effort. Despite the lower importance of external factors in all countries there is significant cross-country variation in this respect. Cross-country differences are found to depend on institutional factors (bargaining structures); countries in which collective agreements are more prevalent and collective agreement coverage is higher report to a greater extent internal pay structures as the main determinant of hiring pay. Within-country differences are found to depend on firm and workforce characteristics; there is a strong association between the use of external factors in hiring pay, on the one hand, and skills (positive) and tenure (negative) on the other.Wage rigidity, newly hired workers, internal pay structure, employee turnover, business cycle, survey data.

Dynamism and Inertia on the Russian Labour Market: A Model of Segmentation

This paper proposes an explanation of the puzzling coexistence of elements of inertia and dynamism on the Russian labour market using a segmentation model. Risk averse workers are differentiated according to their productivity. They face a trade-off between wages and access to social services provided by the firm. The most productive workers leave their initial firm, contract on the spot labour market, and concentrate in the best performing firms. The model provides a possible interpretation of wage arrears which can be viewed as an element of an implicit contract between firms and less productive workers. We test some of the predictions of the model using a panel dataset containing 13,410 firms, for 1993 - 1997.transition, labour market, wage arrears, Russia

Housing market spillovers : evidence from an estimated DSGE model

We study sources and consequences of fluctuations in the housing market. The upward trend in real housing prices of the last 40 years can be explained by slow technological progress in the housing sector. Over the business cycle, housing demand and housing technology shocks explain one-quarter each of the volatility of housing investment and housing prices. Monetary factors explain 20 percent, but they played a bigger role in the housing cycle at the turn of the century. We show that the housing market spillovers are non-negligible, concentrated on consumption rather than business investment, and have become more important over time.Housing, Wealth E¤ects, Bayesian Estimation, Two-sector Models

EMU enlargement and convergence of price levels: Lessons from the German reunification

We analyse the possible impact of EMU enlargement on inflation rates in the accession countries. Using a simple theoretical model we show that the optimal path price adjustments should be asymmetric, i.e. occuring mostly in the candidate countries. Using data from the German reunification we examine how price level convergence could come about. These findings are applied to the enlargement EMU: our findings indicate that (trend) inflation rates in the EMU candidate countries are likely to increase sharply, whereas the impact on the current euro area likely to be small, albeit not negligible. Our results support the need to allow some flexibility in the exchange rate arrangements with the candidate countries facilitate gradual price level convergence prior to EMU enlargement.EMU enlargement, accession countries, inflation, ECB, euro area, Germany, reunification

Housing market spillovers: Evidence from an estimated DSGE model

The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles.House prices, Collateral Constraints, Bayesian methods, Two-sector Models

Dynamic response to foreign transfers and terms-of-trade shocks in open economies

The transmission of shocks and policy changes depends crucially on the structure of the economy. The authors analyze the impact of two classes of external shocks in open economies, using a rational-expectations framework that tests three prototype economies: (1) a neoclassical, full-employment benchmark economy, with intertemporally optimizing consumers and firms and instantaneous clearing of asset, goods, and factor markets; (2) a full employment economy, with partly liquidity-constrained consumers and investors; and (3) a Keynesian economy exhibiting both liquidity constraints and wage rigidity, which results in transitory unemployment. Their model is forward-looking in that the short-run equilibrium of the economy depends on current and expected future values of all exogenous variables, and displays hysteresis (that is, its long-run equilibrium is path dependent). Using parameters for a representative open economy, they simulate and compare the dynamic effects of foreign transfers and of terms-of-trade windfall in the form of a lower price for an imported production input. They contrast the role of Keynesian elements with the neoclassical factors in determining the dynamic adjustment to shocks, by analyzing the effectsof permanent/transitory and anticipated/unanticipated disturbances in the three prototype economies. The results illustrate three main points: (i) both permanent and transitory disturbances cause changes in long-run capacity and output; (ii) transitory and permanent shocks may have opposite effects on the current account; in particular, a permanent favorable foreign shock produces a current account deficit, while a transitory favorable shock induces a current account surplus; and (iii) liquidity constraints and wage rigidities tend to amplify the cyclical adjustment to external shocks.Macroeconomic Management,Economic Stabilization,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies

Monetary policy implications of state-dependent prices and wages

En este trabajo estudiamos los efectos de las perturbaciones monetarias en un modelo donde las probabilidades de ajustar precios y salarios varían con el estado agregado e idiosincrásico debido a los «costes de control». Tanto las empresas al por menor como los trabajadores son competidores monopolísticos sujetos a perturbaciones idiosincrásicas en su productividad y a rigideces nominales. Las rigideces surgen porque tomar decisiones requiere tiempo, y más cuanto mayor sea su precisión. Esto impide que las empresas y los trabajadores ajusten precios y salarios sin error y en el momento justo. Simulamos el modelo seleccionando los parámetros de forma que reproduzca el tamaño y la frecuencia de los cambios en los precios y en los salarios observados en los datos. Los efectos reales de las perturbaciones monetarias son menos persistentes en nuestro marco «dependiente del estado» de lo que serían en un marco «dependiente del tiempo»no obstante, son de una magnitud similar a la observada en los datos macroeconómicos. La «no neutralidad» del dinero en nuestro modelo se debe, principalmente, a la rigidez de los salarios, más que a la de los precios. Cuando el nivel de rigidez nominal depende del estado de la economía, como en nuestro trabajo, la pendiente de la curva de Phillips disminuye cuanto menor es la inflación de largo plazo, ya que los ajustes nominales se hacen menos frecuentes y, por tanto, la inflación de corto plazo reacciona menos a las perturbaciones monetariasWe study the effects of monetary shocks in a model of state-dependent price and wage adjustment based on “control costs”. Suppliers of retail goods and of labor are both monopolistic competitors that face idiosyncratic productivity shocks and nominal rigidities. Stickiness arises because precise decisions are costly, so agents choose to tolerate small errors in the timing of adjustments. Our simulations are calibrated to microdata on the size and frequency of price and wage changes. Money shocks have less persistent real effects in our state-dependent model than they would a time-dependent framework, but nonetheless we obtain sufficient monetary nonneutrality for consistency with macroeconomic evidence. Nonneutrality is primarily driven by wage rigidity, rather than price rigidity. State-dependent nominal rigidity implies a flatter Phillips curve as trend inflation declines, because nominal adjustments become less frequent, making short-run inflation less reactive to shock

Funding the Transition from Pay-As-You-Go Pensions by Taking Capital Gains on Land.

The transition from unfunded pensions may impose a "double burden" on a transitional generation, which must both pay taxes to finance current pension liabilities and save for their own retirement. There are also economic gains which will accrue to future generations from increased rates of savings and capital accumulation. In an economy with land, traded as an asset, increased productivity will raise current and future rents, causing capital gains in the price of land, which may be taxed to alleviate the income tax burden on the transitional generation. For certain parameterizations, reform may be Pareto-improving.