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Labor productivity is generally seen as bringing
wealth and prosperity; but how does it vary over the business cycle?
Aggregate labor productivity is a central
indicator of an economy’s economic development and a wellspring of living
standards. Somewhat controversially, many macroeconomists see productivity
as a primary driver of fluctuations in economic activity along the business
cycle. In some countries, the cyclical behavior of labor productivity seems
to have changed. In the past 20–30 years, the US has become markedly less
procyclical, while the rest of the OECD has not changed or productivity has
become even more procyclical. Finding a cogent and coherent explanation of
these developments is challenging.
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Reducing under-reporting of salaries requires
institutional changes
In transition economies, a significant number of
companies reduce their tax and social contributions by paying their staff an
official salary, described in a registered formal employment agreement, and
an extra, undeclared “envelope wage,” via a verbal unwritten agreement. The
consequences include a loss of government income and a lack of fair play for
lawful companies. For employees, accepting under-reported wages reduces
their access to credit and their social protections. Addressing this issue
will help increase the quality of working conditions, strengthen trade
unions, and reduce unfair competition.
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Negotiating work rules at the firm level instead
of the industry level could lead to productivity gains
Because theoretical arguments differ on the
economic impact of collective bargaining agreements in developing countries,
empirical studies are needed to provide greater clarity. Recent empirical
studies for some Latin American countries have examined whether industry- or
firm-level collective bargaining is more advantageous for productivity
growth. Although differences in labor market institutions and in coverage of
collective bargaining agreements limit the generalizability of the findings,
studies suggest that work rules may raise productivity when negotiated at
the firm level but may sometimes lower productivity when negotiated at the
industry level.
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Labor market regulation should aim to improve the
functioning of the labor market while protecting workers
Governments regulate employment to protect
workers and improve labor market efficiency. But, regulations, such as
minimum wages and job security rules, can be controversial. Thus, decisions
on setting employment regulations should be based on empirical evidence of
their likely impacts. Research suggests that most countries set regulations
in the appropriate range. But this is not always the case and it can be
costly when countries over- or underregulate their labor markets. In
developing countries, effective regulation also depends on enforcement and
education policies that will increase compliance.
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Monopsony models question the classic view of
wage-setting and reveal a new reason why wages may decrease during
recessions
Traditional models of the labor market typically
assume that wages are set by the market, not the firm. However, over the
last 15 years, a growing body of empirical research has provided evidence
against this assumption. Recent studies suggest that a monopsonistic model,
where individual firms and not the market set wages, may be more
appropriate. This model attributes more wage-setting power to firms,
particularly during economic downturns, which helps explain why wages
decrease during recessions. This holds important implications for
policymakers attempting to combat lost worker income during economic
downturns.
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To boost the employment rate of the low-skilled
trapped in inactivity is it sufficient to supplement their earnings?
High risk of poverty and low employment rates
are widespread among low-skilled groups, especially in the case of some
household compositions (e.g. single mothers). “Making-work-pay” policies
have been advocated for and implemented to address these issues. They
alleviate the above-mentioned problems without providing a disincentive to
work. However, do they deliver on their promises? If they do reduce poverty
and enhance employment, is it possible to determine their effects on
indicators of well-being, such as mental health and life satisfaction, or on
the acquisition of human capital?
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Overtime penalties, payroll taxes, and other
labor policies alter costs and change employment and output
Higher labor costs (higher wage rates and
employee benefits) make workers better off, but they can reduce companies’
profits, the number of jobs, and the hours each person works. The minimum
wage, overtime pay, payroll taxes, and hiring subsidies are just a few of
the policies that affect labor costs. Policies that increase labor costs can
substantially affect both employment and hours, in individual companies as
well as in the overall economy.
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The minimum wage affects international migration
flows and the internal relocation of immigrants
An increase in the minimum wage in immigrant
destination countries raises the earnings that low-skilled migrants could
expect to attain if they were to migrate. While some studies for the US
indicate that a higher minimum wage induces immigration, contrasting
evidence shows that immigrants are less likely to move into areas with
higher or more frequent increases in the minimum wage. These different
findings seem to reflect different relocation decisions by immigrants who
have lived in the US for several years, who are more likely to move in
response to higher minimum wages, and by new immigrants, who are less likely
to move.
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Minimum wage increases fail to stimulate growth
and can have a negative impact on vulnerable workers during recessions
Proponents of minimum wage increases have argued
that such hikes can serve as an engine of economic growth and assist
low-skilled individuals during downturns in the business cycle. However, a
review of the literature provides little empirical support for these claims.
Minimum wage increases redistribute gross domestic product away from
lower-skilled industries and toward higher-skilled industries and are
largely ineffective in assisting the poor during both peaks and troughs in
the business cycle. Minimum wage-induced reductions in employment are found
to be larger during economic recessions.
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Policies to tackle wage inequality should focus
on skills alongside reform of labor market institutions
Policymakers in many OECD countries are
increasingly concerned about high and rising inequality. Much of the
evidence (as far back as Adam Smith’s The Wealth of
Nations) points to the importance of skills in tackling wage
inequality. Yet a recent strand of the research argues that (cognitive)
skills explain little of the cross-country differences in wage inequality.
Does this challenge the received wisdom on the relationship between skills
and wage inequality? No, because this recent research fails to account for
the fact that the price of skill (and thus wage inequality) is determined to
a large extent by the match of skill supply and demand.
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