Job protection renders minimum wages less harmful

Individual labour productivities are often unobservable for firms when hiring new workers. Job protection may prevent firms ex post from using information about labour productivities. We show that a binding minimum wage introduced in the presence of job protection will lead to lower unemployment levels than predicted by the standard labour market model with heterogeneous labour and full information. --Minimum wages,unemployment,hidden information,labour market regulation

Asymmetric Information Renders Minimum Wages Less Harmful

We show that a minimum wage introduced in the presence of asymmetric information about worker productivities will lead to lower unemployment levels than predicted by the standard labour market model with heterogeneous labour and symmetric information.minimum wages, unemployment, asymmetric information, labour market regulation

Welfare Effects of Immigration in a Dual Labor Market

The paper analyses the welfare effects of immigration when some sectors of the economy are characterized by wage bargaining between unions and employers. We show that immigration is unambiguously beneficial if the wage elasticity of labor demand in the competitive sectors is smaller than in the unionised sectors. In the opposite case, the welfare effect of immigrat ion is ambiguous; little immigration then reduces the native population's welfare, whereas large scale immigration tends to enhance welfare.Immigration policy, trade unions, welfare

Ageing Municipalities, Gerontocracy and Fiscal Competition

We develop a simple model of fiscal competition among ageing municipalities. When ageing advances, gerontocracies and social planners gradually substitute publicly provided goods aimed at the mobile young population for publicly provided goods for the elderly. Thissubstitution process does not only depend on the ageing itself but also on crowding effects and on the regional distribution of the elderly population. We show that fiscal competition prevents the exploitation of the young. When the share of the elderly is sufficiently large, theutility of the young is even higher in gerontocracies than in welfare maximizing societies. Due to fiscal competition, the gerontocracies will provide even more of the publicly provided good for the young than the social planner.demographic change, fiscal competition, publicly provided goods

The empirical relevance of minimum wages for the low-wage sector

Niedriglohn, Mindestlohn, Wirtschaftlichkeit, Arbeitsplatz, Deutschland, Low wages, Minimum wage, Economic effectiveness, Job, Germany

Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany

We examine evidence for a systematic underperformance of Germany’s state-owned banks in the current financial crisis and study if the bank losses can be traced to the quality of bank governance. For this purpose, we examine the biographical background of 593 supervisory board members in the 29 largest banks and find a pronounced difference in the finance and management experience of board representatives across private and state-owned banks. Measures of “boardroom competence” are then related directly to the magnitude of bank losses in the recent financial crisis. Our data confirms that supervisory board (in-)competence in finance is related to losses in the financial crisis. Improved bank governance is therefore a suitable policy objective to reduce bank fragility.governance, supervisory boards, banking, financial crisis

EU Enlargement : Challenges for Germany's New Laender

EU enlargement offers significant welfare gains to old and new member states. However, these welfare gains do not come automatically but have to be earned by appropriate adjustments in domestic policies. This is particularly relevant for Germany's New Laender, which could benefit from the proximity to the new EU member states in Central and Eastern Europe but which also suffer particularly from inefficient institutions in Germany. Welfare gains will only be realised if wage adjustment is flexible. Instead, the German welfare system implicitly creates downward rigid wages. Without appropriate social policy reforms, the competitive pressure and the mobility of capital will destroy jobs in the New Laender. The paper shows the potential benefits and risks of economic integration in a simple partial equilibrium setting with flexible and rigid labour markets, respectively. We also discuss the entrepreneurial willingness and ability in the New Laender to adjust to the changing competitive conditions after EU enlargement. --EU enlargement,labour markets

Immigration and Skill Formation in Unionised Labour Markets

This paper analyses the impact of immigration on the welfare of the native population in an economy that consists of skilled and unskilled workers. Due to unionisation, the wage rate in the market for unskilled labour is above the competitive level. For a given skill endowment of the native population, we show that immigration reduces the welfare of the host country up to a certain threshold and then increases it with further immigration. For the case of endogenous skill formation, an increase in expected immigration raises the number of skilled individuals in the native population. If the government can credibly commit itself to a certain immigration policy, skill formation of the native population will adjust, so that immigration maybe strictly welfare increasing.Immigration policy, trade unions, occupational choice

The economics of politically-connected firms

Political connections between firms and autocratic regimes are not secret and often even publicly displayed in many developing economies. We argue that tying a firm's available rent to a regime’s survival acts as a credible commitment forcing entrepreneurs to support the government and to exert effort in its stabilization. In return, politically-connected firms get access to profitable markets and are exempted from the regime's extortion. We show that such a gift exchange between government and politically-connected firms can only exist if certain institutional conditions are met. In particular, the stability of the regime has to be sufficiently low and the regime needs the power to exploit independent firms. We also show that building up a network of politically-connected firms acts as a substitute for investments in autonomous stability (such as spending on military and police force). The indirect strategy of stabilizing a regime via politically-connected firms gradually becomes inferior when a regime's exploitative power rises. --Politically-Connected Firms,Clientelism,Political Stability

The economics of repeated extortion

This paper provides a simple model of repeated extortion. In particular, we ask whether corrupt government officials' ex post opportunism to demand more once entrepreneurs have made sunk investments entails further distortion in resource allocations. We show that the inability of government officials to commit to future demands does not distort entry decisions any further if technology is not a choice variable for the entrepreneurs. The government official can properly discount the initial demand in order to induce the appropriate amount of entry. If, however, the choice of technology is left to the entrepreneurs, the dynamic path of demand schedules will induce entrepreneurs to pursue a fly-by-night strategy by adopting a technology with an inefficiently low sunk cost component. In this case, we show that the unique equilibrium is characterized by a mixed strategy of the government official in future demand. Our model thus explains why arbitrariness is such a central feature of extortion. We also investigate implications of the stability of the corrupt regime for dynamic extortion and discuss how our framework can be applied to other investment contexts involving the risk of expropriation. --corruption,repeated extortion,ex post opportunism,dynamic consistency,dynamic cream skimming