Efficiency and Equality in the Labour Market

This paper discusses the costs and benefits of welfare state intervention in the labour market, and argues that many forms of intervention can be justified for efficiency reasons. The paper reviews recent evidence on income inequality and income mobility, and it discusses labour market reforms that may improve efficiency without violating European voters’ preference for equality.welfare state; collective bargaining; inequality; labour market reform

Why are Small Firms Different? Managers' Views

Do incentives in small organizations differ from those in large ones? This paper uses a representative survey of compensation managers to shed light on the issues. I find that (i) small establishments rely less on pecuniary incentives, and have a significantly more hostile attitude towards incentive schemes based on competition and relative rewards; (ii) large units are more vulnerable to mechanisms of efficiency wages, effects that remain even as I control for differences in monitoring ability; (iii) large units are more prone to indicate that negative reciprocity is important, and that their employees care about relative pay. I argue that these findings fit with behavioral stories of incentives and motivation, in particular those stressing group interaction effects, inequity aversion and gift exchange.firm-size effect; motivation; relative pay; field-survey; matched data

On the Determinants of Labour Market Institutions: Rent Seeking vs. Social Insurance

What determines the structure of labour market institutions? I argue that common explanations based on rent seeking are incomplete. Unions, job protection, and egalitarian pay structures may have as much to do with social insurance of otherwise uninsurable risks as with rent seeking. In support of this more benign complementary hypothesis the paper presents a range of historical, theoretical, and cross-country evidence. The social insurance perspective changes substantially the positive analysis of the future of European labour market institutions. It is not clear that globalisation and the “new economy” will force countries to make their labour markets more flexible. These phenomena will probably increase the efficiency costs of existing institutions, but they may also make voters more willing to pay a high premium to preserve institutions that provide insurance.Labour market institutions; comparative historical evidence; Sweden; Massachusetts; rent seeking; social insurance; union models; cross-country regressions; openness; linguistic fractionalisation

On the Analytics of the Dynamic Laffer Curve

In this paper, we analyze government budget balance within a simple model of endogenous growth. For the AK model, simple analytical conditions for a tax cut to be self-financing can be derived. The critical variable is not the tax rate per se, but the ?transfer-adjusted? tax rate. We discuss some conceptual issues in dynamic revenue analysis, and we explain why previous studies have arrived at seemingly contradictory results. Finally, we perform an empirical study of the transfer-adjusted tax rates of the OECD countries to see which country has the highest potential for fiscal improvements; it turns out that only a few countries have any potential for such ?dynamic scoring?.Laffer effects, intertemporal models, dynamic scoring, growth models

Survey Evidence on Wage Rigidity and Unemployment: Sweden in the 1990s

This study reports the results from a repeat survey among managers in Swedish manufacturing, designed to explore how a severe and prolonged macroeconomic shock affects wage rigidity and unemployment. Our second survey was conducted in 1998, when the unemployment rate was much higher, and the inflation rate much lower, than when we conducted the first survey in 1991. We find no evidence that the increase in unemployment has softened the mechanisms generating wage rigidity. On the contrary, we conclude that – because of severe downward nominal wage rigidity – real wages have become more rigid during Sweden’s move to a low-inflation environment. We also report a range of new evidence on underbidding, efficiency wage mechanisms, job security legislation, workers’ wage norms, and to what extent the long-term unemployed are subject to statistical discrimination.Unemployment; wage rigidity; repeat survey; recession

Endogenous Wage Rigidity

We use a random survey of Swedish human resource managers to study the reasons for wage rigidity. Our findings are as follows. First, during the exceptional recession of the 1990s only 1.1 percent of workers received a wage cut. Second, much wage rigidity can be traced to behavioral mechanisms involving negative reciprocity, relative wage comparisons and money illusion. Third, the reasons for wage rigidity differ significantly between large and small establishments, and between the high- and low-end of the labor market. Fourth, there are significant empirical complementarities between efficiency wage mechanisms and worker bargaining strength, and between “exogenous” institutions and endogenous sources of wage rigidity. Fifth, external pay comparisons are a more important source of rigidity in highly unionized establishments. Sixth, there are significant gender differences in pay bargaining and work moral.wage rigidity; survey evidence; matched data; reciprocity; behavioral macroeconomics; labor law

Wage policy and endogenous wage rigidity: a representative view from the inside

We report the results from a representative survey of human resource managers in 885 Swedish firms. We estimate that during the severe recession of the 1990s, only 1.1 percent of workers took a cut in regular nominal pay. We trace the lack of wage moderation to a combination of exogenous (primarily labor law and collective bargaining contracts) and endogenous factors. Our analysis suggests that (i) endogenous wage rigidity plays an important role in most segments of the labor market, (ii) sources of endogenous wage rigidity differ significantly between the high- and low-end of the labor market, and between large and small firms, and (iii) mechanisms of wage rigidity tend to complement each other. Some of our questions deal with issues in the economics of personnel. We report evidence that job protection tends to reinforce the stigma from long-term unemployment, and that labor market training tends to reduce the same stigma. We show that managers in small organizations have a more negative attitude towards incentive schemes based on relative rewards, and we report evidence suggesting that gender have an impact on attitudes concerning effort and motivation.Wage rigidity; survey evidence; effort models; motivation; labor law; long-term unemployment; gender and pay

Tax Arbitrage and Labor Supply

We examine how tax avoidance in the form of trade in well-functioning asset markets affect the basic labor supply model. We show that tax arbitrage has potentially dramatic implications for positive, normative and econometric analysis of how taxes affect work incentives.labor suppy; progressive income taxation; tax arbitrage;

On the Determinants of Labour Market Institutions: Rent-sharing vs. Social Insurance

What determines the structure of labour market institutions? This paper argues that common explanations based on rent sharing are incomplete; unions, job protection, and egalitarian pay structures may have as much to do with social insurance of otherwise uninsurable risks as with rent sharing and vested interests. In support of this more benign complementary hypothesis the paper presents a range of historical, theoretical, and cross-country regression evidence. The social insurance perspective changes substantially the assessment of often-proposed reforms of European labour market institutions. The benefits from eliminating labour market rigidities have to be set against the costs of reduced coverage of human capital related risk. The paper also argues that it is unclear whether the forces of globalisation, and the new economy, will really force countries to make their labour markets more flexible. While these phenomena may increase the efficiency costs of existing institutions, they may also make people more willing to pay a high premium to preserve institutions that provide insurance.Labour market institutions; comparative historical evidence; Sweden; Massachusetts; rent seeking; social insurance; union models; cross-country regressions; openness; linguistic fractionalisation

Bevolent Planners, Malevolent Dictators and Democratic Voters

We study the size of government and of GDP, under autocratic and democratic rule, respectively. It turns out that first, both democratic and authoritarian rulers apply the Samuelson (1954) criterion when deciding on productive public goods. Second, the labor supply elasticity and the skewness of the ability distribution determine whether democracy or autocracy will lead to the highest output. Third, when the ability distribution is sufficiently skewed, the democratic majority will behave like a rational autocrat, who chooses the tax rate that maximizes tax revenue. Fourth, population ageing in Western societies may lead to the policy preferred by a rational autocrat.Leviathan; democracy; median voter; redistribution; public goods