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Depression economics before the General Theory: the order in Cole's Chaos

Snowden, N. — 2009-06-25

Exploiting a neglected account of earlier macroeconomic thinking, the present study addresses continuing controversies over the revolutionary status of Keynes’ General Theory, and the origins of the Great Depression that inspired it. Although G.D.H. Cole's reputation as a labour historian endures, his popular writings on economics are no longer influential. Among these works, a 1932 volume combined Cole's historical perspective on the sources of the Depression with an attempt to present, for the general reader, a consensus account of the economic mechanisms involved. Deflationary forces originating in the real economy, and exacerbated by the operation of the international gold standard, were seen as inducing US policy actions that promoted the Wall Street boom. Supportive of modern writing on inter-war monetary arrangements, Cole's account suggests that structural issues in the emergence of demand deficiency, and the role of the market crash in the subsequent slump, have been under-emphasized in recent research.

Technological progress, obsolescence, and depreciation

Boucekkine, R., del Rio, F., Martinez, B. — 2009-06-25

We construct a two-sector vintage capital model with neutral and investment-specific technical progress and variable utilization of each vintage. The lifetime of capital goods is endogenous and it relies on the associated maintenance costs. First, we show that the lifetime of capital is an increasing (resp. decreasing) function of the rate of neutral (resp. investment-specific) technical progress. Second, we show that both the use-related depreciation rate and the scrapping rate increase when investment-specific technical progress accelerates. However, the latter drops when neutral technical progress accelerates, while the former remains unaffected. It is also shown that (i) the economic depreciation rate depends on the decline rate of the quality-unadjusted relative price of investment and (ii) the age-related depreciation rate depends on the obsolescence rate.

Status jobs, human capital, and growth: the effects of heterogeneity

Tournemaine, F., Tsoukis, C. — 2009-06-25

This paper develops a simple endogenous growth model of human capital accumulation with social status effects. These include status from job quality, as indicated by their relative level of education, as well as ‘keeping up with the Joneses’ in consumption. Symmetrically held, social aspirations increase growth, but possibly to a sub-optimally high level. Under heterogeneity, we show that growth and inequality are negatively related. We distinguish between ‘average’ and ‘differential’ status effects, and point out the difference in the effects on growth and equality between these two classes. Within the ‘differential’ effects class, any rise in ‘gains from’ and decrease in ‘pains from the lack of’ status from either consumption and/or job quality would decrease mean hours in education, growth, and increase inequality.

A theory of efficiency wage with multiple unemployment equilibria: how a higher minimum wage law can curb unemployment

Basu, K., Felkey, A. J. — 2009-06-25

This paper uses efficiency wage theory and the existence of community-based sharing to hypothesize that labor markets in developing countries have multiple equilibria—the same economy can be stuck at different levels of unemployment with different levels of wages. The model is meant for developing economies where wage-productivity links are discernible and income-sharing among the poor is prevalent. It seems reasonable to posit that in such an economy more unemployment leads to more income sharing. The main results are generated combining this claim with a theoretical demonstration of the fact that more sharing increases unemployment rates. As corollaries, we show that (1) within the same society, two different racial groups that may be ex ante identical can have different levels of unemployment and wages in equilibrium and (2) the imposition of a legal minimum wage can raise employment.

Dynamic effects of regulation and deregulation in goods and labour markets

Commendatore, P., Kubin, I. — 2009-06-25

It has been argued in recent economic literature that deregulation in both product and labour markets has beneficial impacts on employment and on real wages. The results offered to support this argument, however, are controversial. So far the debate has been concerned with comparative static results. This paper reassesses the consequences of deregulation in a dynamic context. In our model—a dynamic counterpart of Blanchard and Giavazzi's prototype model—liberalisation in product and/or labour markets also increases the equilibrium employment and wage rates. However, with boundedly rational firms and trade unions, deregulation may generate endogenous fluctuations.

Employment and growth in Europe and the US--the role of fiscal policy composition

Dhont, T., Heylen, F. — 2009-06-25

We construct a simple endogenous growth model to analyse the relationship between the composition of fiscal policy, economic growth and employment. The government sets different tax rates on labour income, capital income, and private consumption to finance productive expenditures, utility-enhancing consumption expenditures, and transfers related to structural non-employment. Our model is able to explain the different employment and growth records of European countries and the US since the 1990s. We use the model to investigate the strength of the effects of various fiscal policy shocks on steady state employment and growth. We also develop the transitional dynamics for many variables, including welfare. Our results highlight the trade-offs that may occur between performance indicators, and between the short and the long-run.

A signaling model of temporary layoffs

Rodriguez-Planas, N. — 2009-06-25

Temporary layoffs are an important feature of North American and European labor markets. This article presents an asymmetric information model of layoffs that explicitly considers the possibility of recall. In this model, high-productivity workers are more likely to be recalled to their former employer and may choose to remain unemployed rather than to accept a low-wage job. In this case, unemployment can serve as a signal of productivity. I present conditions under which all equilibria satisfying the Cho-Kreps intuitive criterion must entail (some) unemployment. Because of productivity gains from valuable job-matches, unemployment may be socially desirable for those workers who were particularly productive with their former employer. If so, a re-employment bonus that encourages low-productivity workers to find a new job but does not discourage high-productivity workers from waiting for recall is an optimal policy from societal perspective. Equity properties of such a policy and its cost effectiveness are analysed.

From public monopsony to competitive market: more efficiency but higher prices

Delfgaauw, J., Dur, R. — 2009-06-25

This paper examines the consequences of creating a fully competitive market in a sector previously dominated by a cost-minimizing public firm. Workers in the economy are heterogeneous in their intrinsic motivation to work in the sector. In line with empirical findings, our model implies that firms in the competitive market reach higher productivity and employ less workers than the public firm. Allocative efficiency therefore increases. Nevertheless, prices of the sector's output rise as competition between private firms for the best motivated workers leads to higher wage cost than under the public monopsony. Political support for liberalization may therefore be limited.

On welfare reducing technological change in a North-South framework

Benchekroun, H., Vishwasrao, S. — 2009-06-25

Northern firms with patented technology can export goods to Southern markets and incur tariff costs or choose FDI and avoid the tariff. We examine the welfare effects of intellectual property protection under this scenario. When it is beneficial to do so, the Southern government offers patent protection in order to induce FDI. We find that a technological improvement in the North can reduce Southern welfare. After a technological improvement, the South still prefers that North does FDI, however longer patent protection may be required to induce FDI which can result in an overall decrease of Southern welfare. Given this immiserizing effect of technological change, Southern countries may choose to adopt higher cost technologies. We also show that a more effective technology does not necessarily require a longer patent protection to induce FDI.

Erratum

2009-06-25