Coen N. Teulings

The Wage Distribution in a Model of the Assignment of Skills to Jobs

This paper discusses a general equilibrium model of the assignment of heterogeneous workers to heterogeneous jobs. Both jobs and workers are measured along a continuous one-dimensional scale. The composition of labor supply is represented by a distribution function. Workers maximize their earnings. Highly skilled workers have an absolute advantage in all jobs and a comparative advantage in complex jobs. Utility is represented by a constant elasticity of substitution function defined over the output of an infinite number of jobs. Equilibrium is characterized by a mapping of skills on complexities. The model is able simultaneously to explain the remuneration of skill, the allocation of skills to jobs, and variations in labor demand per job type. Estimation results for the Netherlands for 1982 and 1988 offer support for its relevance. Wage differentials are due mainly to skill differentials in the left tail of the distribution and to differences between jobs in the right tail.

Education, Growth and Income Inequality

Estimates of the effect of education on GDP (the social return) have been hard to reconcile with micro evidence on the private return to schooling. We present a simple explanation combining two ideas: imperfect substitution and endogenous skill-biased technological progress and use cross-country panel data on inequality and GDP to test these ideas. A one-year increase in the level of education reduces the private return by 2 percentage points, consistent with Katz-Murphys (1992) elasticity of substitution. We find no evidence for reversal of this initial effect as in Acemoglu (2002). In the short run, the social return equals the private return.

Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox

While the employment effects of minimum wages are usually reported to be small (suggesting low substitutability between skill types), direct estimates suggest a much larger degree of substitutability. This article argues that this paradox is largely due to a bias induced by the aggregation of skill types into broad categories. An assignment model is applied where skilled workers have a comparative advantage in complex jobs. The implied pattern of substitutability reveals the sources of the bias. Estimation results for the United States show elasticities of complementarity to be underestimated by up to a factor 2.5. The methods laid out likewise can be applied to other markets where different quality types are close substitutes, such as the housing market.

An econometric model of crowding out of lower education levels

Abstract Unemployment in the Netherlands has risen strongly in recent years. There are large differences in unemployment rates between education levels. According to neo-classical theory these differences should be explained by distorted relative prices or by lack of human capital. In this paper we test an alternative explanation. According to this view the high unemployment rate for lower education levels is caused by excess labour supply. Highly educated people take the jobs which could be occupied by less educated people. To test this view a regression model is developed. Estimation results indicate that differences in unemployment rates can indeed be explained by excess supply of qualified labour.

Comparative Advantage, Relative Wages, and the Accumulation of Human Capital

I apply Ricardo’s principle of comparative advantage to a theory of factor substitutability in a model with a continuum of worker and job types. Highly skilled workers have a comparative advantage in complex jobs. The model satisfies the distance‐dependent elasticity of substitution (DIDES) characteristic: substitutability between types declines with their skill distance. I analyze changes in relative wages due to human capital accumulation. The concept of a complexity dispersion parameter or compression elasticity is introduced. Empirical studies suggest its value to be equal to two: a 1 percent increase in the stock of human capital reduces the Mincerian return by 2 percent.

Inter-industry wage differentials and tenure effects in the Netherlands and the U.S.

We report the results of some standard wage regressions for the Netherlands and compare our results with those of the U.S.. There are marked differences in the magnitude of inter-industry wage differentials and in the effects of firm size, tenure and unemployment. These differences square quite well with other research suggesting that there is a monotonic relationship between the degree of corporatism and the importance of non-competitive wage differentials.

A new theory of corporatism and wage setting

The standard view on corporatist institutions for wage setting in many European economies is based of the insider-outsider model. Corporatism is associated with lack of wage flexibility. This paper discusses a new approach starting from the importance of nominal contracts. The rationale for these contracts is to avoid future bargaining. Adjusting these contracts ex post to aggregate shocks would raise their efficiency. However, avoiding the bargaining required for this adjustment was the main reason for negotiating these contracts in the first place. This is the fundamental contradiction. Under corporatism, outside institutions can play this role. These institutions provide therefore a type of flexibility not available in decentralized economies. Empirical evidence supports the basic ideas of this model.

Labor market search with two sided heterogeneity: hierarchical versus circular models

Abstract Search models with two-sided heterogeneity and hierarchical sorting are difficult to solve analytically. Teulings and Gautier (2004) apply Taylor expansions, which are only valid close to the Walrasian equilibrium. This paper applies a simpler circular model instead of the more realistic hierarchical model. Workers and firms are located on a circle. We derive the unique analytical equilibrium of this model and show that it has the same characteristics as the Taylor expansion of the hierarchical model. This raises hope that the former can be used as a proxy for the latter in more complex settings.

BRIDGING THE GAP BETWEEN 'JOE SIXPACK' AND 'BILL GATES': ON THE EFFICIENCY OF INSTITUTIONS FOR REDISTRIBUTION**

All democracies have implemented institutions that redistribute income from the rich to the poor. Economists tend to have strong views on how this redistribution should be organized, based on the two theorems of welfare economics. However, these views are mostly neglected. I argue that the reason for this neglect is likely to be that these institutions are constrained Pareto-efficient after a century of experimentation. If not, some political bargaining would lead to the implementation of the Pareto-improvement. Hence, economists should concentrate on an explanation of the constrained efficiency of existing institutions instead of on the design of drawing table grand reforms. This approach is applied to three institutions frequently observed in reality: minimum wages, education subsidies, and unemployment insurance. We show that these institutions for redistribution are likely to be constrained efficient. We analyze the impact of the constitutional environment on the implementation of efficient redistribution. Finally, we evaluate the causes for the observed cross-country variation in redistribution.

Unemployment and house price crises: Lessons for Fiscal Policy from the Dutch Recession

Since the beginning of the financial crisis in 2008, the Dutch economy lost 6% of gdp relative to Germany, even though the Netherlands (unlike the GIPSI countries) did not face serious problems to finance its sovereign debt. This bad performance is explained by the interaction of fiscal policy and the housing market. This makes the Netherlands an interesting case because these effects can be analyzed in isolation of stress on financial markets. We sketch a simple overlapping generation framework. House price declines lead to a temporary drop in consumption, forcing a reallocation of labour from domestic to tradable industries. This leads to a loss in industry specific human capital, causing a jump in unemployment. The analysis yields a number of lessons for fiscal policy in the aftermath of a financial crisis and for the current EU framework for the evaluation of member states’ fiscal policy. Fiscal policy provided too little intergenerational insurance and the EU framework is an obstacle to do that.JEL codesE32, E62 and J64