Oxford Economic Papers - recent issues

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

Introduction

Gregory, M., Beblo, M., Salverda, W., Theodossiou, I. — 2009-03-25

Establishment-level wage effects of entering motherhood

Beblo, M., Bender, S., Wolf, E. — 2009-03-25

We analyse the wage effects following employment breaks of women who enter motherhood using a novel matching approach where mothers’ wages upon return to work are compared to those of their female colleagues within the same establishment. Using an administrative German data set, we apply a fixed-effects propensity score matching based on information two years before birth of the first child. Our results yield new insights into the nature of the wage penalty associated with motherhood: when matching with establishment-specific effects we find that first births reduce women's wages by 19%, whereas ignoring the identifier and matching across all establishments would yield a wage cut of 26%. We therefore conclude that selection into establishments is an important explanatory factor for the family pay gap.

Panel estimates of the wage penalty for maternal leave

Buligescu, B., Crombrugghe, D. d., Mentesoglu, G., Montizaan, R. — 2009-03-25

The focus of this paper is the size of the wage penalty due to maternal leave incurred by working mothers in Germany. Existing estimates suggest large penalties with little rebound over time. We apply recent panel data methods designed to address problems of sample selectivity, unobserved heterogeneity and endogeneity to German Socio-Economic Panel (GSOEP) data. Heckman's classic treatment of selectivity is extended to deal with both heterogeneity and simultaneity. In order to exploit the actual working hours data available in GSOEP, we develop the case of a censored tobit participation model. We also investigate the sensitivity of the results to the choice of method. Our estimates imply a maternal leave wage penalty of 10 to 14% which is less persistent over time than other studies suggest. Five years after the return to work maternal wages have caught up.

What determines the part-time and gender earnings gaps in Britain: evidence from the workplace

Mumford, K., Smith, P. N. — 2009-03-25

This study examines the role of individual and workplace characteristics in accounting for differences in hourly earnings between men and women in full and part-time jobs in Britain. A four-way gender-working time split (male full-timers, male part-timers, female full-timers, and female part-timers) is analysed, and allowance is explicitly made for workplace and occupational female segregation. Within gender groups, the striking difference between full and part-time employees is that full-timers work in higher paying occupations than do part-timers. Also, female occupational segregation makes a significant contribution to the earnings gap between male and female part-time employees but not for full-time workers. A further new result is that female workplace segregation contributes significantly to the full/part-time earnings gap of both males and females. Part-time employees work in more feminized workplaces and their earnings are lower. There remains, moreover, a substantial residual gender earnings gap between male and female employees.

The part-time pay penalty: earnings trajectories of British Women

Connolly, S., Gregory, M. — 2009-03-25

Part-time work among British women is extensive, and the (raw) pay penalty large. Since part-time work features most prominently when women are in their 30s, the peak childcare years and a crucial period for career building, its impact on subsequent earnings trajectories is important from a social as well as individual perspective. We find that part-time work experience gives a very low return in future earnings, particularly when acquired in lower-skill jobs. In addition, one-quarter of women in high-skill jobs downgrade occupationally on switching to part-time work, rising to 43% among those who also change employer. In combination these effects give an immediate earnings drop of 32%, followed by a permanently lower trajectory. It is these accompanying changes, rather than part-time status itself, which damage earnings. Return to full-time work, even with reversal of the occupational downgrading, brings only a partial recovery; without it the earnings losses continue to grow.

Human capital depreciation during hometime

Gorlich, D., de Grip, A. — 2009-03-25

We estimate human capital depreciation rates during career interruptions due to family reasons (parental leave and household time) in male- and female-dominated occupations. If human capital depreciation due to family related career breaks is lower in female than in male occupations, this can explain occupational sex segregation because women will take the costs of future breaks into account when optimizing their lifetime earnings. We find that short-run depreciation rates in high-skilled occupations are significantly lower in female than in male occupations. In low-skilled occupations, there is no evidence of this difference. Our findings support the self-selection hypothesis with respect to occupational sex segregation in the more skilled jobs, i.e. high-skilled women might deliberately choose female occupations because of the lower short-term wage penalties for family-related career interruptions.

Gender differences in low pay labour mobility and the national minimum wage

Phimister, E., Theodossiou, I. — 2009-03-25

This paper examines gender differences in the duration of low pay employment spells prior to and after the introduction in the National Minimum Wage in 1999. The results suggest that the dynamics out of low pay differ by gender and that these differences change after 1999. These differences are driven by the differing impact of a number of covariates such as age and education on the baseline hazards. Overall, the effect of many covariates on expected duration is often less in absolute terms for women than men, although such differences frequently decline after 1999. At mean values, gender differences in expected duration of low pay effectively disappear and gender differences in the exit probability to high pay decline after 1999. However, for individuals with characteristics most associated with long periods of low pay, the high pay exit probability is substantially lower after 1999 for women than for men.

Motherhood and market work decisions in institutional context: a European perspective

Del Boca, D., Pasqua, S., Pronzato, C. — 2009-03-25

This paper explores the impact of social polices and labour market conditions on women's decisions on work and childbearing. This is analysed using data from the European Community Household Panel (ECHP). The aim of the paper is to jointly estimate the two decisions while controlling for factors such as personal characteristics, variables related to the childcare system, parental leave arrangements, family allowances, and part time work opportunities. Our empirical results indicate that differences in social policies across European countries account for a non-negligible percentage of the differences in women's labour market participation across these countries. The environment variables have a marginally significant effect on fertility decisions, which varies by women's level of education. Certain types of part time work opportunities, childcare, optional parental leave, and child allowances have a larger impact on participation decisions of women with lower levels of education.

Maternal employment and child care decision

Coneus, K., Goeggel, K., Muehler, G. — 2009-03-25

When estimating the determinants of child care participation, the simultaneity in mothers' decision to work and in the decision to use child care is a major challenge. We provide first evidence on the determinants of institutional child care use addressing the endogeneity of mothers' labor supply by applying an instrumental variables approach. This endogeneity has often been neglected in studies on child care choice, even though the decision to use child care outside the home is strongly connected to mothers' decision to work after childbirth and vice versa. Based on the German Socio-economic Panel (SOEP) from 1989 to 2006 we show that children living in West Germany have a higher probability to attend institutional care if their mothers increase their actual weekly working time. Estimating the determining factors of child care participation without addressing the simultaneity issue substantially underestimates the influence of maternal working time.

Job security and job protection

Clark, A., Postel-Vinay, F. — 2009-03-23

We construct indicators of the perception of job security for various job types in 12 European countries using individual data from the European Community Household Panel (ECHP). We then consider the relation between reported job security and OECD summary measures of Employment Protection Legislation (EPL) strictness on the one hand, and Unemployment Insurance Benefit (UIB) generosity on the other. We explicitly recognize that insecure types may attempt to self-select into more secure jobs. After modeling this selection, we find that workers feel most secure in permanent public sector jobs, least secure in temporary jobs, with permanent private sector jobs occupying an intermediate position. We also find that perceived job security in both permanent private and temporary jobs is positively correlated with UIB generosity, while the relationship with EPL strictness is negative: workers feel less secure in countries where jobs are more protected. These correlations are absent for permanent public jobs, suggesting that such jobs are perceived to be by and large insulated from labor market fluctuations.

Working hours flexibility and older workers' labor supply

Gielen, A. C. — 2009-03-23

This paper studies the presence of hours constraints on the UK labor market and its effect on older workers labor supply. Using panel data for the period 1991–2004, the results from a competing risks model show that over-employed male workers can freely reduce working hours with their current employer before retiring completely. However, some over-employed women are observed to leave the labor market early due to hours constraints. This suggests that more flexibility in working hours can increase the labor market participation for some older workers as has often been suggested.

Gender wage differentials, job search, and part-time employment in the UK

Bowlus, A. J., Grogan, L. — 2009-03-23

Gender wage differentials in the UK are examined using a general equilibrium search model. This framework permits an assessment of male-female differences in labour market behaviour on gender wage differentials. The model captures worker decisions leading to transitions between labour market states and jobs, and firm responses to such transitions via wage offers. Special attention is paid to part-time workers, who have substantially less labour market attachment than full-time workers. The results indicate labour market behaviour differences play a role in determining gender wage differentials within education levels. The importance of these differences varies by education level and hours of work. These findings have implications for policies aimed at reducing gender wage differentials, and for researchers assessing the causes of gender wage differentials in situations where a large fraction of women work part-time.

Education, dynamic signalling, and social distance

Gallice, A. — 2009-03-23

In many European countries the average level of education has grown steadily over the last few generations. The paper shows how such a trend can be easily rationalized by a model that extends a standard signalling game in two directions. First, a temporal structure is induced by having two different cohorts of individuals playing the game. Second, to standard rational agents, the model postulates the existence of two classes of agents that care about their relative position in the distribution of educational choices. Conformist individuals wish to be close to the average level; status seeking individuals seek to be above it. Results show that the presence of these two classes of individuals generates an average level of education that changes and increases over time for a wide range of choice of parameters. Consequences of this increasing level of education on the behaviour of the firms are also explored.

Generalizations of SEU: a geometric tour of some non-standard models

Ryan, M. J. — 2009-03-23

Subjective expected utility (SEU) theory is ubiquitous in models of economic environments involving uncertainty. Part of its appeal is its elegant axiomatization by Anscombe and Aumann, whose representation theorem uses little more than the simple geometry of expected utility. Nevertheless, the elegance of the SEU axioms comes at the cost of significant restrictiveness. Several generalizations of SEU have been developed to address its empirical and conceptual weaknesses. This paper offers a synthesis of these non-standard decision models. For each model, we sketch a proof of its representation theorem that adapts the geometry of Anscombe and Aumann.

Ambiguity and social interaction

Eichberger, J., Kelsey, D., Schipper, B. C. — 2009-03-23

A decision-maker is said to have an ambiguous belief if it is not precise enough to be represented by a single probability distribution. The pervasive assumption in game theoretic models in economics is that players' beliefs are unambiguous. This paper argues, drawing on examples from economics and politics, that it may be illuminating, in instances, to model players as having ambiguous beliefs. Optimistic and pessimistic responses to ambiguity are formally modelled. We show that pessimism has the effect of increasing (decreasing) equilibrium prices under Cournot (Bertrand) competition. In addition the effects of ambiguity on peace-making are examined. It is shown that ambiguity may select equilibria in coordination games with multiple equilibria. Some comparative statics results are derived for the impact of ambiguity in games with strategic complements.

Individuals and teams in auctions

Sutter, M., Kocher, M. G., Strauss, S. — 2009-03-23

Experimental studies on bidding in auctions have so far relied on individual bidders, even though teams are often involved in real auctions. We examine the bidding behaviour of individuals and teams. Our experimental results show that teams stay longer in an (ascending sealed-bid English) auction and pay significantly higher prices than individuals. Consequently, teams make smaller profits and suffer more often from the winner's curse. The auction's efficiency is nevertheless higher with teams, since bidders with the highest valuation are more likely to win the auction when teams bid. We relate our findings to the European UMTS-spectrum auctions.

Central bank communication and output stabilization

Hoeberichts, M., Tesfaselassie, M. F., Eijffinger, S. — 2009-03-23

Central banks around the world have a reputation for being secretive about their operations and market assessments. It is sometimes argued that central banks need flexibility and therefore cannot be fully transparent. We find that this explanation does not carry through in a forward-looking New Keynesian framework, where transparency about the central bank's forecasting procedures improves output stabilization. We also show that higher transparency increases optimal conservatism, as the benefits from higher transparency in terms of output stabilization are greater the more conservative is the central bank.

Acknowledgements

2009-03-23