nep-ltv New Economics Papers
on Unemployment, Inequality and Poverty
Issue of 2007‒03‒24
nine papers chosen by
Maximo Rossi
University of the Republic

  1. Identifying the Role of Labor Markets for Monetary Policy in an Estimated DSGE Model By Kai Christoffel; Keith Kuester; Tobias Linzert
  2. A New Keynesian Model with Unemployment By Olivier Blanchard; Jordi Galí
  3. Wage Risk and Employment Risk Over the Life Cycle By Low, Hamish; Meghir, Costas; Pistaferri, Luigi
  4. Individual Well-Being in a Dynamic Perspective By Conchita D'Ambrosio; Joachim R. Frick
  5. Workers’ Flows and Real Wage Cyclicality By Anabela Carneiro; Pedro Portugal
  6. Minimum Wages, the Earned Income Tax Credit, and Employment: Evidence from the Post-Welfare Reform Era By David Neumark; William Wascher
  7. The Impact of the Recent Migration from Eastern Europe on the UK Economy* By David G. Blanchflower; Jumana Saleheen; Chris Shadforth
  8. Mobility and earnings in Ethiopia ' s urban labor markets, 1994-2004 By Bigsten, Arne; Mengistae, Taye; Shimeles, Abebe
  9. Obesity, Unhappiness, and The Challenge of Affluence : Theory and Evidence By Oswald, Andrew J; Powdthavee, Nattavudh

  1. By: Kai Christoffel (European Central Bank); Keith Kuester (European Central Bank); Tobias Linzert (European Central Bank)
    Abstract: We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy.
    Keywords: Labor Market, Wage Rigidity, Bargaining, Bayesian Estimation
    JEL: E32 E52 J64 C11
    Date: 2007–02–14
  2. By: Olivier Blanchard (Massachusetts Institute of Technology); Jordi Galí (Universitat Pompeu Fabra)
    Abstract: We develop a utility based model of fluctuations, with nominal rigidities, and unemployment. In doing so, we combine two strands of research: the New Keynesian model with its focus on nominal rigidities, and the Diamond-Mortensen-Pissarides model, with its focus on labor market frictions and unemployment. In developing this model, we proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and we draw the implications for optimal monetary policy.
    Keywords: New Keynesian Model, Labor Market Frictions, Search Model, Unemployment, Sticky Prices, Real Wage Rigidities
    JEL: E32 E50
    Date: 2007–02–15
  3. By: Low, Hamish; Meghir, Costas; Pistaferri, Luigi
    Abstract: This paper decomposes the sources of risk to income that individuals face over their lifetimes. We distinguish productivity risk from employment risk and identify the components of each using the Survey of Income and Program Participation and the Panel Study of Income Dynamics. Estimates of productivity risk controlling for employment risk and for individual labour supply choices are substantially lower than estimates that attribute all wage variation to productivity risk. We use a partial equilibrium life-cycle model of consumption and labour supply to analyse the choices individuals make in the light of these risks and to measure the welfare cost of the different types of risk. Productivity risk induces a considerably greater welfare loss than employment risk primarily because productivity shocks are more persistent. Reflecting this, the welfare value of government programs such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides (partial) insurance against employment risk and no insurance against persistent shocks.
    Keywords: Employment risk; life-cycle models; Precautionary savings; Uncertainty; unemployment; Wage risk
    JEL: D91 E21 H31 J64
    Date: 2007–03
  4. By: Conchita D'Ambrosio; Joachim R. Frick
    Abstract: This paper explores the determinants of individual well-being as measured by self-reported levels of satisfaction with income. Making full use of the panel data nature of the German Socio-Economic Panel, we provide empirical evidence for well-being depending on absolute and on relative levels of income in a dynamic framework. This finding holds after controlling for other influential factors in a multivariate setting. The main novelty of the paper is the consideration of dynamic aspects: the individual's own history as well as the relative income performance with respect to the others living in the society under analysis do play a major role in the assessment of well-being.
    Keywords: Interdependent Preferences, Inequality Aversion, Status, Subjective Well-Being, SOEP
    JEL: D63 I31 D31
    Date: 2007
  5. By: Anabela Carneiro (Universidade do Porto and CETE); Pedro Portugal (Banco de Portugal, Universidade Nova de Lisboa and IZA)
    Abstract: This study investigates real wage cyclicality in Portugal for the years of 1986-98, addressing the heterogeneity in wages responses to aggregate labor market conditions for workers’ hirings and separations. The results exhibit a moderate procyclical behavior of real wages for continuously employed workers, in particular, for job stayers. For workers’ accessions a strongly procyclical behavior in wages was observed, which is consistent with the idea that entry wages are much more procyclical than current wages. This empirical evidence suggests that even micro-data estimates of real wage cyclicality may conceal a strong procyclical wage behavior, when heterogeneity on wages responses to aggregate conditions between employed workers and hirings and separations is not taken into account.
    Keywords: wage cyclicality, hirings, separations
    JEL: D21 J30 J31
    Date: 2007–02
  6. By: David Neumark (University of California, Irvine, NBER and IZA); William Wascher (Federal Reserve Board)
    Abstract: We study the effects of minimum wages and the EITC in the post-welfare reform era. For the minimum wage, the evidence points to disemployment effects that are concentrated among young minority men. For young women, there is little evidence that minimum wages reduce employment, with the exception of high school dropouts. In contrast, evidence strongly suggests that the EITC boosts employment of young women (although not teenagers). We also explore how minimum wages and the EITC interact, and the evidence reveals policy effects that vary substantially across different groups. For example, higher minimum wages appear to reduce earnings of minority men, and more so when the EITC is high. In contrast, our results indicate that the EITC boosts employment and earnings for minority women, and coupling the EITC with a higher minimum wage appears to enhance this positive effect. Thus, whether or not the policy combination of a high EITC and a high minimum wage is viewed as favorable or unfavorable depends in part on whose incomes policymakers are trying to increase.
    Keywords: minimum wage, Earned Income Tax Credit, welfare reform, employment
    JEL: H24 I38 J2
    Date: 2007–02
  7. By: David G. Blanchflower (Dartmouth College, NBER, Bank of England and IZA); Jumana Saleheen (Bank of England); Chris Shadforth (Bank of England)
    Abstract: UK population growth over the last thirty-five years has been remarkably low in comparison with other countries; the population grew by just 7% between 1971 and 2004, less than all the other EU15 countries except Germany. The UK population has grown at a faster pace since the turn of the millennium driven primarily by changes in net migration, and in particular from an influx of migrants from eight East European (A8) countries. There appears to be consistent evidence from the Worker Registration Scheme and National Insurance Number applications that approximately 500,000 migrants from the A8 countries had come to work in the UK between May 2004 and late 2006. But other sources suggest approximately half of these workers have likely returned to their country of origin. We argue that, at present, it appears that A8 immigration has tended to increase supply by more than it has increased demand in the UK (in the short run). This migration flow, we argue, has acted to reduce inflationary pressures and to lower the natural rate of unemployment.
    Keywords: migration, UK
    JEL: J61 J11 J21
    Date: 2007–02
  8. By: Bigsten, Arne; Mengistae, Taye; Shimeles, Abebe
    Abstract: An analysis of panel data on individuals in a random selection of urban households in Ethiopia reveals large, sustained, and unexplained earnings gaps between public and private, and formal and informal sectors over the period 1994-2004. The authors have no formal evidence whether these gaps reflect segmentation of the labor market along either of these divides. In other words, they canno t show whether they are at least in part due to impediments to entry in the higher wage sector. But they do have evidence that, if segmentation explains any part of the observed earnings gaps, then it could only have weakened over the survey decade. The authors find, first, that the rate of mobility increased between the two pairs of sectors. Sample transition rates grew across survey waves, while state dependence in sector choice decreased. Second, the sensitivity of sector choice to earnings gaps increased over the same period. In particular, the role of comparative earnings in selection into the informal sector was evident throughout the survey decade and increased in magnitude over the second half of the period.
    Keywords: Labor Markets,Labor Standards,Work & Working Conditions,Markets and Market Access,Labor Management and Relations
    Date: 2007–03–01
  9. By: Oswald, Andrew J (Department of Economics, University of Warwick); Powdthavee, Nattavudh (Institute of Education, University of London)
    Abstract: Is affluence a good thing? The book The Challenge of Affluence by Avner Offer (2006) argues that economic prosperity weakens self-control and undermines human well-being. Consistent with a pessimistic view, we show that psychological distress has been rising through time in modern Great Britain. Taking over-eating as an example, our data reveal that half the British population view themselves as overweight, and that happiness and mental health are worse among fatter people in both Britain and Germany. A 10-point move up in body mass index (BMI) is associated in the cross-section with a drop in psychological health of approximately 0.3 GHQ points. Comparisons also matter. For a given level of BMI, we find that people who are educated or who have high income are more likely to view themselves as overweight. We discuss problems of inference and argue that longitudinal data on BMI are needed. We suggest a theory of imitation -- where utility depends on relative weight -- in which there can be obesity spirals after only small drops in the price of food.
    Keywords: Body mass index ; happiness ; mental health ; General Health Questionnaire ; GHQ scores ; BMI ; well-being ; obesity ; BHPS ; GSOEP ; imitation ; weight ; relative income ;comparisons
    JEL: D1 I12 I31
    Date: 2007

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