Evaluating the Economic Significance of Downward Nominal Wage Rigidity

This paper seeks to contribute to the literature on downward nominal wage rigidity (DNWR) along two dimensions. First, we formulate and solve an explicit model of wage-setting in the presence of worker resistance to nominal wage cuts - something that has previously been considered intractable. In particular, we show that this resistance renders wage increases (partially) irreversible. Second, using this model, we can explain why previous estimates of the macroeconomic effects of DNWR have been so weak despite remarkably robust microeconomic evidence. In particular, we show that previous studies have neglected the possibility that DNWR can lead to a compression of wage increases as well as decreases. Thus, the literature may have been overstating the costs of DNWR to firms. Using micro-data for the US and Great Britain, we find robust evidence in support of the predictions of the model. In the light of this evidence, we conclude that increased wage pressure due to DNWR may not be as large as previously envisaged, but that the data is nevertheless consistent with a model in which workers resist nominal wage cuts.Nominal Wage Rigidity, Loss Aversion, Irreversibility

The decline of the U.S. labor share

Over the past quarter century, labor's share of income in the United States has trended downward, reaching its lowest level in the postwar period after the Great Recession. A detailed examination of the magnitude, determinants, and implications of this decline delivers five conclusions. First, about a third of the decline in the published labor share appears to be an artifact of statistical procedures used to impute the labor income of the self-employed that underlies the headline measure. Second, movements in labor's share are not solely a feature of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by the trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, prima facie evidence for institutional explanations based on the decline in unionization is inconclusive. Finally, our analysis identifies offshoring of the labor-intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years

The labor market in the Great Recession

This paper documents the adjustment of the labor market during the recession, and places it in the broader context of previous postwar downturns. What emerges is a picture of labor market dynamics with three key recurring themes: 1. From the perspective of a wide range of labor market outcomes, the 2007 recession represents the deepest downturn in the labor market in the postwar era. 2. Until recently, the nature of labor market adjustment in the current recession has displayed a notable resemblance to that observed in past severe downturns. 3. During the latter half of 2009, however, the path of adjustment has exhibited important departures from that seen in prior deep recessions.Labor market ; Unemployment ; Recessions

Unemployment dynamics in the OECD

We provide a set of comparable estimates for the rates of inflow to and outflow from unemployment for 14 OECD economies using publicly available data. We then devise a method to decompose changes in unemployment into contributions accounted for by changes in inflow and outflow rates for cases where unemployment deviates from its flow steady state, as it does in many countries. Our decomposition reveals that fluctuations in both inflow and outflow rates contribute substantially to unemployment variation within countries. For Anglo-Saxon economies we find approximately a 20:80 inflow/outflow split to unemployment variation, while for Continental European and Nordic countries, we observe much closer to a 50:50 split. Using the estimated flow rates we compute gross worker flows into and out of unemployment. In all economies we observe that increases in inflows lead increases in unemployment, whereas outflows lag a ramp up in unemployment.Unemployment

The Role of Worker Flows in the Dynamics and Distribution of UK Unemployment

Unemployment varies substantially over time and across subgroups of the labour market. Worker flows among labour market states act as key determinants of this. We examine how the structure of unemployment across groups and its cyclical movements across time are shaped by changes in labour market flows. Using novel estimates of flow transition rates for the UK over the last 35 years, we decompose unemployment variation into parts accounted for by changes in rates of job loss, job finding and flows via non-participation. Close to two-thirds of the volatility of unemployment in the UK over this period can be traced to rises in rates of job loss that accompany recessions. The share of this inflow contribution has been broadly the same in each of the past three recessions. Decreased job-finding rates account for around one-quarter of unemployment cyclicality and the remaining variation can be attributed to flows via non-participation. Digging deeper into the structure of unemployment by gender, age and education, the flow-approach is shown to provide a richer understanding of the unemployment experiences across population subgroups.labour market, unemployment, worker flows

A Great Recession in the UK Labour Market : A Transatlantic Perspective

The increase in unemployment in the United Kingdom that accompanied the Great Recession has been conspicuous by its moderation. The rise in joblessness is dwarfed by the recent experience of the United States, by past recessionary episodes in the U.K. and by the contraction in GDP in the U.K. Increased rates of job loss have played a dominant role in shaping the rise in British unemployment. Unemployment duration has not increased to the levels seen in previous recessions, in contrast to the U.S. where duration substantially exceeds previous peaks. Looking forward, the U.K. labour market appears to have adjusted fully to the shocks that prompted the recession. Signs of reductions in match efficiency witnessed recently in the U.S. are not mirrored in the U.K. In contrast, while long-term unemployment currently remains well below historical levels, recent estimates of job finding rates suggest that it has the potential to rise much further. Thus, a timely recovery in aggregate demand will play an important role in averting persistently high unemployment in the future.Labour market ; business cycle ; unemployment ; worker flows JEL Classification: E24 ; J6

The Labor Market in the Great Recession

From the perspective of a wide range of labor market outcomes, the recession that began in 2007 represents the deepest downturn in the postwar era. Early on, the nature of labor market adjustment displayed a notable resemblance to that observed in past severe downturns. During the latter half of 2009, however, the path of adjustment exhibited important departures from that seen during and after prior deep recessions. Recent data point to two warning signs going forward. First, the record rise in long-term unemployment may yield a persistent residue of long-term unemployed workers with weak search effectiveness. Second, conventional estimates suggest that the extension of Emergency Unemployment Compensation may have led to a modest increase in unemployment. Despite these forces, we conclude that the problems facing the U.S. labor market are unlikely to be as severe as the European unemployment problem of the 1980s

Which industries are shifting the Beveridge curve?

The negative relationship between the unemployment rate and the job openings rate, known as the Beveridge curve, has been relatively stable in the U.S. over the last decade. Since the summer of 2009, however, the U.S. unemployment rate has hovered between 9.4 and 10.1 percent in spite of firms reporting more job openings. We decompose the recent deviation from the Beveridge curve into different parts using data from the Job Openings and Labor Turnover Survey (JOLTS). We find that most of the current deviation from the Beveridge curve can be attributed to a shortfall in the vacancy yield, which measures hires per vacancy. This shortfall is broad-based across all industries and is particularly pronounced in construction, transportation, trade, and utilities, and leisure and hospitality. Construction alone accounts for more than a third of the Beveridge curve gap.Unemployment ; Employment (Economic theory) ; Labor market

The role of worker flows in the dynamics and distribution of UK unemployment

Unemployment varies substantially over time and across subgroups of the labour market. Worker flows among labour market states act as key determinants of this variation. We examine how the structure of unemployment across groups and its cyclical movements across time are shaped by changes in labour market flows. Using novel estimates of flow transition rates for the UK over the last 35 years, we decompose unemployment variation into parts accounted for by changes in rates of job loss, job finding and flows via non-participation. Close to two-thirds of the volatility of unemployment in the UK over this period can be traced to rises in rates of job loss that accompany recessions. The share of this inflow contribution has been broadly the same in each of the past three recessions. Decreased job-finding rates account for around one-quarter of unemployment cyclicality and the remaining variation can be attributed to flows via non-participation. Digging deeper into the structure of unemployment by gender, age and education, the flow-approach is shown to provide a richer understanding of the unemployment experiences across population subgroups. Key words: labour market ; unemployment ; worker flows JEL classification: E24 ; J6

Time variation in the dynamics of worker flows:evidence from North America and Europe

Vector autoregressive methods have been used to model the interrelationships between job vacancy rates, job separation rates and job-finding rates using tools such as impulse response analysis. We investigate whether such impulse responses change across the business cycle or over time, by estimating time-varying parameter–vector autoregressions for data from North America (the USA and Canada) and Europe (France, Spain and the UK). While the adjustment process of the labour market to shocks in Canada and the USA is similar, we find the adjustment process differs much more across the European countries, with greater persistence in shocks relative to the USA and Canada