Institutions and service employment: a panel study for OECD countries

We live in a service economy, but the extent of development of service employment differs across developed countries. This paper assesses the role of structural factors and institutions in explaining the common patterns and main di?erences in the recent expansion of service employment in OECD countries. It finds that GDP per capita, the size of the government sector and the extent of urbanization are positively associated with the service employment share. However, the evidence suggests that laws and institutions such as product market regulations, unions and more coordinated wage-setting systems are hampering the expansion of service employment. JEL Classification: J21, L80, L51Employment, Product and Labor Market Regulations, Service Industries, Structural change

Job flow dynamics and firing restrictions: evidence from Europe

We exploit homogeneous firm level data of manufacturing and non-manufacturing sectors to study the impact of firing restrictions on job flow dynamics across 14 European countries. We find that more stringent firing laws dampen the response of job destruction to the cycle, thus making job turnover less counter-cyclical. Moreover, the impact of firing costs on job creation and job destruction varies across sectors, depending on sector-specific trend growth. Our findings clearly suggest that such costs are more important in contracting than in growing sectors. JEL Classification: J23, J63, J68business cycle, Europe, Firing Costs, Gross Job Flows

Downward wage rigidity and optimal steady-state inflation

This paper examines the impact of downward wage rigidity (nominal and real) on optimal steady-state inflation. For this purpose, we extend the workhorse model of Erceg, Henderson and Levin (2000) by introducing asymmetric menu costs for wage setting. We estimate the key parameters by simulated method of moments, matching key features of the cross-sectional distribution of individual wage changes observed in the data. We look at five countries (the US, Germany, Portugal, Belgium and Finland). The calibrated heterogeneous agent models are then solved for different steady state rates of inflation to derive welfare implications. We find that, across the European countries considered, the optimal steady-state rate of inflation varies between zero and 2%. For the US, the results depend on the dataset used, with estimates of optimal inflation varying between 2% and 5%. JEL Classification: E31, E52, J4downward wage rigidity, DSGE Models, optimal inflation

Formal education, mismatch and wages after transition: Assessing the impact of unobserved heterogeneity using matching estimators

This paper studies the incidence and consequences of the mismatch between formal education and the educational requirements of jobs in Estonia during the years 1997-2003. We find large wage penalties associated with the phenomenon of educational mismatch. Moreover, the incidence and wage penalty of mismatches increase with age. This suggests that structural educational mismatches can occur after fast transition periods. Our results are robust for various methodologies, and more importantly regarding departures from the exogeneity assumptions inherent in the matching estimators used in our analysis. JEL Classification: J0Education mismatch, Matching Estimators, wage determination

The role of product market regulations in the process of structural change

The sectoral allocation of labor differs considerably across developed economies, even in the presence of similar patterns of structural change. A general equilibrium model that captures the stylized facts of structural change is presented. In this framework, product market regulations raise barriers to entry that hinder the development of sectors with income elastic demand such as service industries. Thus, the paper suggests that differences in the regulations of product markets might help explaining cross-country differences in the sectoral allocation of employment. Cross-country evidence discussed in the paper shows that this proposition is supported by the data for a sample of OECD countries. Additionally, the model shows that higher service prices and rents in regulated economies reduce labor supply, providing a rationale for the negative association between product market regulations and the employment rate previously found in the literature

Sectoral Structure and Entry Regulations

The sectoral allocation of labor differs considerably across developed economies, even in the presence of similar patterns of structural change. A general equilibrium model that captures the stylized facts of structural change is presented. In this framework, economy-wide barriers to entry hinder the development of dynamic sectors such as service industries. Moreover, higher service prices and rents in regulated economies reduce labor supply, providing a rationale for the negative association between product market regulations and the employment rate previously found in the literature. Empirical evidence presented shows that regulatory entry barriers help explaining differences in the sectoral allocation of labor across OECD countries

Are specific skills an obstacle to labor market adjustment? Theory and an application to the EU enlargement

We argue that the existence of large amounts of specific human capital makes costly and slows down the adjustment in the labor market after large reallocation shocks. To illustrate this point we build a theoretical framework in which young agents’ career is heavily determined by initial education, and analyze the transition to a new steady-state after a sectoral demand shift. An interesting case study is the EU enlargement, which led to modernization of many sectors in eastern countries and to a fast decline of traditional industries. Using labor force data from a large economy with rigid labor markets, Poland, and a small open economy with increased flexibility, Estonia, we document and find support for our claim. Quantitative exercises suggest that the overspecializaton of the labor force in Poland explain to a large extent the much higher and persistent unemployment compared to Estonia during the period of EU enlargement. JEL Classification: J30Enlargement, Labor Reallocation, Matching, Specific Skills, Vocational Education

Real Wages over the Business Cycle: OECD Evidence from the Time and Frequency Domains

We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market.dynamic correlation, business cycle, real wages, labour market institutions

Wage Rigidity and Disinflation in Emerging Countries

This paper examines the consequences of rapid disinflation for downward wage rigidities in two emerging countries, Brazil and Uruguay, relying on high quality matched employer-employee administrative data. Downward nominal wage rigidities are more important in Uruguay, while wage indexation is dominant in Brazil. Two regime changes are observed during the sample period, 1995-2004: (i) in Uruguay wage indexation declines, while workers' resistance to nominal wage cuts becomes more pronounced; and (ii) in Brazil, the introduction of inflation targeting by the Central Bank in 1999 shifts the focal point of wage negotiations from changes in the minimum wage to expected inflation. These regime changes cast doubts on the notion that wage rigidity is structural in the sense of Lucas (1976).downward wage rigidity, indexation, matched employer-employee data, emerging economies

Real wages over the business cycle: OECD evidence from the time and frequency domains

We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market. JEL Classification: E32, J30, C10business cycle, dynamic correlation, Labour market institutions, real wages