Lecture 2: Labour Economics and Wage-Setting Theory

Transcription

1 Lecture 2: Labour Economics and Wage-Setting Theory Spring 2017 Lars Calmfors Literature: Laun Egebark-Kaunitz Chapter 5 Cahuc-Carcillo-Zylberberg (pp )

2 2 Topics Evaluation of Swedish EITC Payroll ta cuts for youth in Sweden Search theory The reservation wage Unemployment duration

3 3 Swedish EITC (jobbskatteavdrag) Introduced from 2007 five steps Difficult to study since it applies to all groups Double EITC for workers above 65 Difference-in-differences study Lisa Laun (2012) has compared employment outcomes in year t for those becoming 65 in November/December year t-1 (receiving supplementary EITC in year t) and those becoming 65 in January/February year t (and not receiving supplementary EITC in year t). Similar incentives in the pension system

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6 1-t a 1-t m 6

7 7 (3) = labour outcome = vector of individual characteristics = set of indicator variables for the individual s age in months at the beginning of the ta year = set of indicator variables for the year in which the outcome is measured = indicator value which takes the value 1 if the individual is aged 65 or more at the beginning of the ta year and the year is 2007 or later (when the age-targeted credit was in place)

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13 13 Summary of results for supplementary EITC 1.5 percentage points higher probability employment No significant effect on taable labour earnings Significant effect on taable labour earnings as a share of previous earnings Significant effect on remunerated months Effects only on males Effects increase with education Effects concentrated among healthier individuals Effects for those with younger spouse Larger effects for self-employed EITC or payroll ta rate reduction? Effects are likely to be larger on already employed than on non-employed

14 14 Egebark-Kaunitz Cuts in payroll taes for youth in Sweden 2007 and : 11 percentage points cut for year olds : Reduction etended to 25-year olds; additional 6 percentage points and for those eligible Effects on employment of youth Difference-in-Differences approach Linear controls Y i,t = δ t D(i,t) + ' i,t β + ε i,t Y i,t = Employment status D(i,t) = Treatment indicator i,t = Vector of control variables Also matching of treatment-control group pairs in local markets

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16 16 Egebark-Kaunitz, cont. Assumption of parallel trends - not testable - eamine treatment effects before treatment - reduce bandwidth Relative effects vs absolute effects because of spillovers - substitution effects - scale effects - substitution effects likely to dominate - thus upper bound for effects

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19 19 Basic job search theory Labour supply model leaves out many crucial aspects There are costs of looking for work Imperfect information on jobs Important to distinguish between: - non-participation - unemployment } - employment participation Modern theory of job search McCall (1970) and Mortensen (1970) Model can be applied to other markets as well - finding an apartment - finding the best loan - finding a wife (husband) A distribution of jobs with different wages Decision problem of job searcher: when to stop searching and accept a job offer - choose a reservation wage and accept the first job offer above the reservation wage Only unemployed persons search for a job - no on-the-job search Analysis of a steady state

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22 22 Cumulative distribution of wage offers (jobs): H(.) A job offer is a proposal of a constant real wage w for all future periods on the job Risk-neutral agents; no disutility of work Instantaneous utility over time interval dt: wdt Rate of job destruction: qdt r = real rate of interest Discounted value at time t of a dollar received at time t + dt is thus 1/(1 + rdt) V e = discounted value of employment V u = discounted value of unemployment V = 1 wdt + qdt V + qdtv 1 + rdt [ (1 ) ] e e u (1) Multiply by (1 + rdt), divide by dt and rearrange: rv = w + q( V V ) (2) Interpretation: e u e LHS: Epected flow of income from employment (return r on asset V e ) RHS: certain wage - epected capital loss (probability of becoming unemployed capital loss of going from employment to unemployment)

23 23 (2) can be written: V e - V = u w - rv r + q u Optimal search strategy 1. If no job offer, continue searching! 2. If job offer, accept if V e (w) > V u! Otherwise continue searching! V e = V u if w = rv u Hence, a job offer is accepted if the wage is above the threshold value = rv u (stopping rule) is the reservation wage λdt = job offer arrival rate c = cost of job search (both financial costs and opportunity costs) b = revenue while searching for a job (unemployment benefit) z = b - c = instantaneous utility from looking for a job

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25 24 Job offer is accepted if w >. Otherwise not. V λ = discounted value of getting a job offer V = V dh ( w ) + V ( w ) dh ( w ) λ 0 dh( w) = H '( w) dw u X e If no job offer, the job searcher continues to look for a job. Then discounted value of job search is: V 1 = zdt + dtv dt V u λ rdt [ λ (1 λ ) ] Multiply by (1 + rdt), divide by dt and combine with equation for V λ : u [ ] rv = z + λ( V V ) = z λ + V ( w ) V dh ( w ) (5) λ u u e u Interpretation: LHS: Return from the asset of being unemployed RHS: Instantaneous flow of income z + epected capital gain from getting a job offer (= probability of job offer) capital gain from getting a job offer

26 25 λ [ V ( w ) V ] dh ( w ) = λ( V V ) e u λ u has been used in (5). To see this: [ V ( w ) V ] dh ( w ) = V ( w) dh ( w ) V dh ( w ) e u e (A) u Use: V λ VdH( w) + V ( w ) dh( w) = u 0 e V ( w) dh ( w) = V V dh ( w) e λ (B) u 0 Insert (B) into (A): V e u λ = u u 0 [ ] V ( w) V dh( w) = V dh( w) V dh( w) 0 [ ] = V V dh ( w) + dh ( w) = V V H( ) + 1 H( ) λ u λ u = V λ V u

27 26 Note that: 0 H '( w ) dw = H ( ) H (0) = H ( ) H '( w) dw = 1 H ( ) H (W) 0 X W

28 27 V ( w) V = e = rv u u w rv u r + q (3) (4) [ ( ) ] ( ) (5) rv = z + λ V w V dh w u e u Plug (3) and (4) into (5): w rv w u = z + λ dh ( w) = z + λ dh ( w) = r + q r + q λ = z + ( w ) dh( w) r + q

29 28 Eit rate from unemployment (hazard rate) A job searcher becomes employed when: 1. A job offer is received: probability λ 2. The wage offer is above the reservation wage : probability [1-H()] Hence the eit (hazard) rate is: λ[1-h()] Duration of unemployment is: 1 T u = λ 1 H( ) [ ] If the eit rate per week is 1/10, then the average duration of unemployment is 10 weeks. Not unepectedly: a higher reservation wage prolongs the duration of unemployment H() (1 - H()) T u

30 29 Comparative statics of job search model = z + λ ( w ) dh( w) r + q Write it: Φ (, z, r, λ, q) = z λ ( w ) dh( w) = r + q 0 Let i = zr,, λ, q Total differentiation of Φ gives: Φ d + Φ di = i 0 d di Φ = Φ i We are interested in the effects on the reservation wage of changes in utility when unemployed, the real interest rate, the arrival rate of job offers and the rate of job destruction. λ Φ = 1 -( ) H '( ) H '( w) dw = r + q λ λ = 1 + H '( w) dw = 1 + ( 1 H( ) ) > 0 r + q r + q

31 30 b( ) g( ) = f (, i) di a( ) g'( ) = b'( ) f (, b( )) a'( ) f (, a( )) + f '( i, ) di b( ) a( ) A = ( w ) dh( w) = ( w ) H '( w) dw da d = H '( )( ) + H '( w)( 1) dw = 0 H '( w) dw < 0

32 31 Φ z = 1 = λ ( ) ( ) > 0 ( r + q) Φ r w dh w 2 = λ ( ) ( ) > 0 ( r + q) Φ q w dh w 2 d dz ( ) Φ z = > Φ 0 ( + ) d dr ( + ) Φ r = < Φ ( + ) 0 d dq ( + ) Φ q = < Φ ( + ) 0

33 32 Intuition: Utility of unemployment Reservation wage and duration of unemployment Real interest rate Reservation wage and duration of unemployment - Less gain from high income in the future: accept job with lower wage Job destruction Reservation wage and duration of unemployment - Less gain from a job as it is held for a shorter time 1 Φλ = ( w ) dh( w) < 0 r + q d dλ ( ) Φ λ = > Φ ( + ) 0

34 33 Job offer arrival rate Reservation wage - Job searchers can be more choosy the more offers they get But ambiguous effect on duration of unemployment T u = λ 1 [ 1 H( ) ] On the one hand: H() T u On the other hand: λ T u Empirical result: T u

35 34 Alternative models 1. Labour supply model - employed participant - non-participant 2. Job search model (everyone is participating) - unemployed job searcher - employed 3. Hybrid model - non-participant - unemployed job searcher - employed } participant Labour supply model Participation depends on comparison of current wage w with reservation wage w A w > w A employee w w A non-participant

36 35 Hybrid model with job search The reservation wage is the wage at which the job seeker is indifferent between accepting a job and continuing to search Ω = Ω(H, z, q, λ, r) denotes the overall characteristics of the labour market Choice between participation and non-participation is based on comparison between epected value of being a job seeker V u and that of a non-participant V I. Epected utility flow of a non-participant rv I = R I, if R I is constant income at each date. Epected utility of a job seeker is rv u = Participation if V u V I (Ω) R I Acceptance of job offer if w > (Ω) Participation decision does not only depend on w but on all factors affecting the labour market - increase in z (unemployment benefit) raises and hence participation - at the same time unemployment rises

37 36 Discouraged workers Those workers who would like to have a job, but are not actively searching because the costs of searching are regarded as too large Average of possible wages: E = wdh ( w) = wh '( w) dw w 0 0 Discouraged workers are those for whom: ( Ω) R E I w Epected wage above income as non-participant the worker would accept a job if it could be obtained without searching Reservation wage below income as non-participant it does not pay to search for a job Real world Unclear distinction between participants and non-participants Jones and Ridell (1999). Study for Canada - employed - unemployed - marginally attached to labour-market participation - non-participants Marginally attached to labour-market participation - waiting to be recalled by former employer - have found a job but haven t been hired yet - waiting for an answer form an employer - no jobs matching their qualifications

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