Jonas Agell

On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance

The common view that far-reaching labour market deregulation is the only remedy for high European unemployment is too simplistic. First, the evidence suggests that deeply rooted social customs are an important cause of wage rigidity, going beyond the legal constraints emphasized in the political debate. Second, in a second-best setting, a compressed wage structure may generate an efficiency gain. Finally, based on simple plots of the relation between labour market institutions and openness in OECD countries, I conclude that the globalization of economic activity may lead to increased demand for various labour market rigidities.

Growth and the public sector: a critical review essay

We review the theoretical and empirical evidence on the relation between growth and the public sector against the background of the current debate on the issue. The evidence is found to admit no conclusion on whether the relation is positive, negative or non-existent. A simple cross-country regression in an OECD sample illustrates how the relation is easily tilted from negative to positive by introducing control variables for initial GDP and the dependent population.

Survey Evidence on Wage Rigidity and Unemployment: Sweden in the 1990s*

This study reports the results from a repeat survey among managers in Swedish manufacturing, designed to explore how a severe and prolonged macroeconomic shock affects wage rigidity and unemployment. Our second survey was conducted in 1998, when the unemployment rate was much higher, and the inflation rate much lower, than when we conducted the first survey in 1991. We find no evidence that the increase in unemployment has softened the mechanisms generating wage rigidity. On the contrary, we conclude that – because of severe downward nominal wage rigidity – real wages have become more rigid during Sweden’s move to a low-inflation environment. We also report a range of new evidence on underbidding, efficiency wage mechanisms, job security legislation, workers’ wage norms, and to what extent the long-term unemployed are subject to statistical discrimination.

Minimum wages and the incentives for skill formation

We show that minimum wages may have beneficial effects on human capital allocation in a situation when the marginal product of skilled labor is shared between firm and worker according to bargaining strength. Firms prefer more productive workers to less p

UNION EGALITARIANISM AS INCOME INSURANCE

It is a common observation that unions often try to compress the wage distribution among their members as compared with the productivity distribution. A troublesome aspect of standard theories of redistributive unions is the question why high-productivity workers choose to enter the union in the first place. This paper develops and explores the implications of an alternative insurance rationale for egalitarian wage objectives. Apart from providing a simple explanation of why heterogeneous union members may agree on egalitarian wage policies, it also suggests a more guarded attitude toward the welfare costs of pay compression. Copyright 1992 by The London School of Economics and Political Science.

Crime and Unemployment in Turbulent Times

We use the exceptional variation in municipality-level unemployment in Sweden during the 1990s to identify the effect of unemployment on crime. Our findings are as follows: (i) There is a statistically and economically significant effect of general unemployment on the incidence of burglary, auto theft, and drug possession; (ii) we find no evidence for the popular view that youth unemployment matters for crime; (iii) prime-aged unemployment is robustly correlated with main categories of youthful crimes, a finding consistent with the idea that unstable life conditions of parents have adverse spillover effects on the life-choices of their children. (JEL: J00, K4) (c) 2007 by the European Economic Association.

Fiscal Policy when Monetary Policy is Tied to the Mast

The paper analyses the time inconsistency problem of both exchange rate and fiscal policy in a small open economy. The equilibrium under discretion is characterised by inflation and a deficit. Comm ...

Fair Wages in the Open Economy

The authors show how an extended theory of fair wages can be incorporated in the two-by-two Heckscher-Ohlin model. An important feature of the model is the existence of involuntary unemployment. Several results stand out. First, there is no longer a simple relation between measures of factor abundance and trade patterns. Second, factor-price equalization will generally not occur. Third, differences in social norms explain why terms of trade shocks produce nonuniform adjustments in real wages and unemployment across otherwise similar countries. Fourth, losses from trade may occur. Finally, in countries where fairness considerations are important, tariffs may increase welfare. Copyright 1995 by The London School of Economics and Political Science.

Growth effects of government expenditure and taxation in rich countries: A comment

In a recent article Stefan Folster and Magnus Henrekson [2001] argue that “…the more the econometric problems that are addressed, the more robust the relationship between government size and economic growth appears”. But in failing to control for simultaneity in a valid manner the regressions reported by Folster/Henrekson are flawed. Moreover, using theoretically valid instruments we find that the estimated partial correlation between size of the public sector and economic growth is statistically insignificant and highly unstable across specifications. A policy-maker who wants to promote growth is well-advised to look for other evidence than cross-country growth regressions.

Growth and the public sector : a reply

Folster and Henrekson (1998) claim that they, by addressing a number of econometric problems, can establish that it is likely that economies with a large public sector grow more slowly than economies with a small public sector. But their regressions are fundamentally flawed. Re-estimating their growth equation using theoretically valid instruments, we find that the growth effect of the public sector is statistically insignificant, and much smaller than the point-estimates reported by Folster and Henrekson. This is consistent with the agnostic conclusion, drawn by us and many others, that cross-country growth regressions are unlikely to give a reliable answer to whether a large public sector is growth promoting or retarding.