Giuseppe Bertola

Job security, employment and wages

Abstract Job security provisions are often cited as a major factor in the high unemployment in European economies. This paper finds that such provisions do not bias labor demand toward lower average employment at given wages, nor do they bias wage determination toward higher wages. In the countries considered, medium and long run employment appears unrelated to the extent of job security legislation. In high job security countries, wages tend to be lower and more sensitive to outside unemployment. Job security provisions alone cannot be blamed for the high unemployment in European countries.

Irreversibility and Aggregate Investment

Investment is often irreversible, in that installed capital has little or no value unless used in production. In the presence of ongoing uncertainty, an individual firms irreversible investment policy optimally alternates short bursts of positive gross investment to periods of inaction, when the installed capital stock is allowed to depreciate. The behavior of aggregate investment series is characterized by sluggish, continuous adjustment instead. We argue in this paper that aggregate dynamics should be interpreted in terms of unsynchronized irreversible investment decisions by heterogenous firms, rather than in terms of ad-hoc adjustment cost functions in a representative-agent framework. We propose a closed-form solution for a realistic model of sequential irreversible investment, characterize the aggregate implications of microeconomic irreversibility and idiosyncratic uncertainty, and interpret U.S. data in light of the theoretical results.

Kinked Adjustment Costs and Aggregate Dynamics

Because adjustment costs may make infrequent corrections preferable to partial continuous adjustment, microeconomic units often behave quite differently from representative agents in aggregate dynamic models. Idiosyncratic uncertainty precludes perfect coordination of microeconomic adjustment and explains the much smoother behavior of aggregate variables. This paper reviews and extends models of optimal adjustment under uncertainty and of dynamic aggregation, and argues that unsynchronized microeconomic adjustment can provide a sensible, structural interpretation of macroeconomic time series. A simple statistical representation of the process followed by aggregate variables in the presence of microeconomic adjustment costs and of idiosyncratic uncertainty is shown to satisfactorily explain the behavior of U.S. durable consumption data.

Employment Protection in Industrialized Countries: The Case for New Indicators

The poor employment performance of European countries compared with that of the U.S. is often attributed to the strictness of employment protection in Europe. Many believe that differences in labour market regulations play an important role in explaining international differences in labour market outcomes. This argument clearly has strong implications for policy design. If tight rules governing employment protection are to be blamed for poor labour market performance, then conservative governments may reduce restraints on the ability of firms to hire and fire (by weakening trade unions and labour market regulations for example). This controversial proposition has generated a considerable literature and much debate. Theoretical models show that employment protection does tend to have a constraining effect on both layoffs and hirings, job creation and destruction, unemployment inflows and outflows, with the extent to which one effect dominates the other depending on the values of the parameters. It follows that the role played by employment protection in determining aggregate labour market outcomes is mainly an empirical question. However, the available empirical evidence on the relationship between employment protection and labour market performance is based on highly imperfect measures of the strictness of employment protection legislation (EPL).1 While considerable work – both theoretical and empirical – has been done on the subject, few studies have focused on how employment protection is measured. Previous research has circumvented measurement difficulties by using qualitative rankings of EPL stringency. But recent developments – notably ongoing reforms of employment protection in most countries and the expansion of non-standard forms of employment – have not only rendered existing information obsolete, they have also called into question the methodological basis of that empirical research.

A Pure Theory of Job Security and Labour Income Risk

Models of labour market equilibrium where forward-looking decisions maximize both profits and labour income on a risk-neutral basis, offer valuable insights into the effects of employment protection legislation. Since risk-neutral behaviour in the labour market presumes perfect insurance, however, job security provisions play no useful role in such models. This Paper studies a stylized model of dynamic labour market interactions where labour reallocation costs are partly financed by uninsured workers’ consumption flows. In the resulting second-best equilibrium, provisions that shift labour reallocation costs to risk-neutral employers can increase productive efficiency if their administrative deadweight costs are not too large, and increase workers’ welfare as long as employers’ firing costs at least partly finance workers’ mobility.

Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate

We propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements, and study the interaction of profit-maximizing banks with a central bank targeting interest rates at high frequency. The model yields predictions on biweekly patterns of the federal funds rates volatility and on its response to changes in target rates and in intervention procedures, such as those implemented by the Fed in 1994. Theoretical results are consistent with empirical patterns of interest rate volatility in the U.S. market for federal funds.

Wage Inequality and Unemployment: United States versus Europe

Throughout the 1970s and 1980s, wage differentials widened in the U.S. but not in Europe, where marginal labor-force groups experienced increasing and persistent unemployment instead. Both phenomena may be explained, for different labor-market institutions, by more pronounced volatility of labor-demand forcing processes in a simple model of labor allocation under idiosyncratic uncertainty. If workers bear the costs of labor reallocation, then a higher option value of work in currently depressed regions, occupations, or sectors is consistent with wider wage differentials in equilibrium. Under centralized wage setting and job-security legislation, conversely, higher likelihood of negative shocks in the near future decreases labor demand by hiring firms. These and other implications of our model are consistent with the phenomena motivating our work and with other pieces of evidence.

Macroeconomics of distribution and growth

This Chapter reviews various interactions between the distribution of income across individuals and factors of production on the one hand, and aggregate savings, investment, and macroeconomic growth on the other.

Cross-Sectional Efficiency and Labour Hoarding in a Matching Model of Unemployment

We study positive and normative aspects of steady-state equilibrium in a market where firms of endogenous size experience idiosyncratic shocks and undergo a costly search process to hire their workers. The stylized model we propose highlights interactions between job-security provisions and sectoral shocks in determining the natural rate of unemployment, the allocation of labour, and the extent of labour hoarding, and rationalizes cross-sectional asymmetries of gross employment flows at the firm level. In our model, where productivity and search costs are dynamically heterogeneous across firms, decentralized wage bargains imply important cross-sectional inefficiencies, which overshadow the static search inefficiencies on which simpler models focus.

Interest Rate Targeting and the Dynamics of Short-Term Rates

We find that in 1989-1996, when U.S. monetary policy tightly targeted overnight fed funds rates, the volatility and persistence of spreads between target and term fed funds levels were larger for longer-maturity loans. We show that such patterns are consistent with an expectational model where target revisions are infrequent and predictable. In our model, the (autoco-) variance of the spreads of term fed funds rates from the target increases with maturity because longer-term rates are more heavily influenced by persistent expectations of future target changes.