Centralization of wage bargaining and the unemployment rate: revisiting the hump-shape hypothesis

Is there a relation between wage bargaining institutions and unemployment? The humpshape hypothesis”, first introduced by Calmfors and Driffill (1988), states that countries with highly centralized and highly decentralized wage bargaining processes have a superior performance in terms of unemployment than countries with an intermediate degree of centralization. Calmfors and Driffill’s results were obtained on a sample including data from 1962 up to 1985. This paper shows that the claimed superiority in terms of unemployment of centralized countries over intermediate ones during the ’60s and the ’70s depended upon their high levels of government expenditure and public sector employment. The evidence shows that from the beginning of the ’80s the expansion of the public sector in centralized countries slowed down considerably and, at the same time, the correlation between the degree of centralization and unemployment weakened. This evidence helps reconcile recent findings of poor correlations between measures of economic performance and indexes of bargaining systems with Calmfors and Driffill’s original results. The paper concludes by questioning the compatibility of the reported evidence with the theoretical framework proposed by CD to explain the hump-shape hypothesis.wage negotiations, unemployment rate, public employment

Employment in the Public Sector

This paper presents a model of wage-employment determination in private and public sectors, which allows us to analyze the effects of different institutional arrangements on labor market equilibria. In particular, it focuses on how different degrees of coordination in decision processes affect hiring and wage setting outcomes. Cooperation in unions’ behavior results in wage increases and employment reduction in the private sector, whereas it induces wage moderation and employment expansion in the public sector. Not surprisingly, if public decision units do not fully internalize the aggregate budget constraint in their hiring processes, the public sector wage bill and the level of taxation increase, thus enhancing the crowding out effect on private employment. Such effect appears to be stronger in the presence of encompassing union behavior. An empirical analysis performed on a sample of OECD countries in the period 1960-2000 seems to support the main predictions of the model.public employment, wage bargaining, decentralization

Funding a PAYG pension system: the case of Italy

Italy is characterised by a mature pay-as-you-go social security system and by particularly adverse population projections. Given these trends, the social security contribution rate is expected to increase above its current high level. This hinders the development of employer-provided pension funds and introduces a significant wedge between labour cost and earnings that discourages both labour demand and labour supply. Any proposal to reduce payroll taxes and to reform the system in the direction of partial funding has to cope with the state of Italian public finances. Italy has to comply with the Stability and Growth Pact that imposes constraints on budget deficit and debt trends. Using micro data from the Bank of Italy"s Survey of Household Income and Wealth and official population projections, we estimate future employment trends under different demographic and macroeconomic scenarios and compute the cost of the transition. We show that it would be substantially reduced if positive effects on employment were induced by the payroll tax reduction.

Macroeconomic effects of greater competition in the service sector: the case of Italy

The paper assesses the effects of increasing competition in the service sector in Italy which, based on cross-country comparisons, is the OECD country with the highest markups in non-manufacturing industries. We propose a two-region (Italy and the rest of the euro area) dynamic general equilibrium model allowing for monopolistic competition in the labor, manufacturing and service markets. We then use the model to simulate the macroeconomic and spillover effects of increasing the degree of competition in the Italian services sector. Our results indicate that reducing the service sector markups to the levels of the rest of the euro area increases in the long run Italian GDP by 11 percent and welfare (measured in terms of steady state consumption equivalents) by about 3.5 percent. Half of the GDP increase would be realized in the first three years. The spillover effects to the rest of the euro area are limited.competition, general equilibrium models, markups, monetary policy

Inflation convergence and divergence within the European Monetary Union

We study the convergence properties of inflation rates among the countries of the European Monetary Union over the period 1980-2004. Given the Maastricht agreements and the adoption of the single currency, the sample can be naturally split into two parts, before and after the birth of the euro. We study convergence in the first sub-sample by means of univariate and multivariate unit root tests on inflation differentials, arguing that the power of the tests is considerably increased if the Dickey-Fuller regressions are run without an intercept term. Overall, we are able to accept the convergence hypothesis over the period 1980-1997. We then investigate whether the second sub-sample is characterized by stable inflation rates across the European countries. Using stationarity tests on inflation differentials, we find evidence of diverging behaviour. In particular, we can statistically detect two separate clusters, or or convergence clubs: a lower inflation group that comprises Germany, France, Belgium, Austria, Finland and a higher inflation one with Spain, Netherlands, Greece, Portugal and Ireland. Italy appears to form a cluster of its own, standing in between the other two. JEL Classification: C12, C22, C32, E31Absolute Convergence, inflation differentials, stability, Unit Root Tests

The adequacy of life insurance: evidence from the health and retirement survey

This study examines life insurance adequacy among married American couples approaching retirement based on the 1992 Health and Retirement Survey with matched Social Security earnings histories. It evaluates each household's life insurance needs based on new financial planning software that embodies a life-cycle-planning model and covers a broad array of demographic, economic, and financial characteristics. A sizable minority of households are significantly underinsured. Almost one third of wives and over 10 percent of husbands would have suffered living-standard reductions greater than 20 percent had their spouses died in 1992.Insurance ; Life insurance companies

How much should Americans be saving for retirement?

How much should Americans save prior to retirement? Given Social Security's shaky financial condition, this is a critical question for baby boomers. A financial planning program-ESPlanner-is applied to data from the Health and Retirement Survey (HRS) to consider the amount that households approaching retirement should save.Retirement ; Saving and investment ; Social security

The Adequacy of Life Insurance: Evidence from the Health and Retirement Survey

This study examines the adequacy of life insurance among married American couples approaching retirement. It improves upon previous work in two ways. First, it is based on recent, high quality data (the 1992 Health and Retirement Survey with matched Social Security earnings histories). Second, it employs new financial planning software to evaluate the life insurance needs of each household. This software embodies an elaborate life- cycle planning model that accounts for a broad array of demographic, economic, and financial characteristics. We find that a sizable minority of couples in the HRS sample are significantly underinsured. Almost one third of wives and more than 10 percent of husbands would have suffered living standard reductions of 20 percent or more had their spouses died in 1992. Underinsurance tends to be more common among low income households, couples with asymmetric earnings, younger households, couples with dependent children, and non-whites. In general, households with greater vulnerabilities do not appear to compensate adequately for these vulnerabilities through greater life insurance holdings. Among some groups, the frequency of underinsurance exceeds two-thirds, and the frequency of severe underinsurance (a reduction in living standard of 40 percent or greater) exceeds one-quarter.

The mismatch between life insurance holdings and financial vulnerabilities: evidence from the Health and Retirement Survey

Using data on older workers from the 1992 Health and Retirement Survey, along with an elaborate life-cycle planning model, the authors quantify the effect of each individual's death on the financial status of his or her survivors and the degree to which life insurance holdings moderate these consequences. The average change in living standard that would result from a spouse's death is small, both in absolute terms and relative to the decline that would occur without insurance. However, this average obscures a startling mismatch between insurance holdings and underlying vulnerabilities. For many of the most vulnerable, the amounts purchased are surprisingly small, and for many of the least vulnerable, the amounts are surprisingly large. As a result, uninsured vulnerabilities are quite widespread. The magnitude of these vulnerabilities, as well as the proclivity to address any given degree of vulnerability by purchasing life insurance, vary systematically with individual and household characteristics.Life insurance companies

Climate-change adaptation: The role of fiscal policy

Climate change and natural disasters have important consequences on fiscal sustainability, especially for developing countries with limited financial resources and underdeveloped institutions. The paper contributes to shed light on the role of fiscal policy in climate-change adaptation, which aims at containing the economic damage of climate change. We use an overlapping generations (OLG) model for a small open economy in which adaptation reflects the extent to which public policies reduce the negative influence of climate change on the capital depreciation rate. Adaptation includes both preventive measures, i.e. investment in infrastructure, and remedial measures, i.e. post-disaster relief and reconstruction. Through model simulations we assess the costs and benefits of both remedial and preventive actions. We find that preventive intervention leads to higher GDP growth rates than either taking no action or waiting until remedial action is necessary. However, the evidence shows that, due to high costs of early adaptation and budgetary constraints, countries tend to focus on late corrective actions, also relying on international assistance. Given the expected increase in climate-related risks, a comprehensive strategy including both preventive and corrective actions would be desirable to strengthen resilience to shocks and alleviate the financial constraints, which particularly affect small countries