Rainer Fehn

Falling Labor Share and Rising Unemployment: Long-Run Consequences of Institutional Shocks?

Abstract The literature on unemployment has mostly focused on labor market issues while the impact of capital formation is largely neglected. Job creation is often thought to be a matter of encouraging more employment on a given capital stock. In contrast, this paper explicitly deals with the long-run consequences of institutional shocks on capital formation and employment. It is shown that the usual tradeoff between employment and wages disappears in the long run. In line with an appropriation model, the estimated values for the long-run elasticities of substitution between capital and labor for Germany and France are substantially greater than one.

Real Wage Rigidities, Fiscal Policy, and the Stability of EMU in the Transition Phase

EMU started with eleven member countries as scheduled on January 1, 1999. The paper shows that the primacy of politics over economics in this decision could have serious consequences concerning the stability of EMU in the transition phase. Speculative attacks against currencies which are in economic distress due to asymmetric shocks can still happen. A speculative attack as such cannot force a country out of EMU. However, the country concerned might voluntarily decide to leave the system as the costs of staying inside EMU, e.g., due to further rising unemployment, become too large to bear.

Reforming the Welfare State: The German Case

The Federal Republic of Germany has a long tradition of social policy. Social policy in Germany was restricted to safety regulations for workers until the second half of the last century. However, a milestone in this development was the buildup of a state-organized social security system in the 1880s by Chancellor Bismarck. Health and accident insurance for workers were started in 1883 and in 1884, respectively, whereas pension insurance for workers was installed in 1889. In 1911, pension insurance for employees was added. The public social security system was further extended during the Weimar Republic (1919–1932) and completed by the installation of an unemployment insurance system in 1927 before the start of the Great Depression. Apart from the further extension of safety regulations for workers, several new social policies were added during this time: labor market policy (autonomous and collective wage negotiations, state-run job counseling and placement services, etc.), codetermination rights, public welfare, and housing policy. After the Second World War, the already existing social policies (safety regulations for workers, social security, codetermination rights, public welfare, and housing policy) were not only preserved and enforced, family, education, and redistribution policies were also added.

Real wage rigidities, accommodative demand policies, and the functioning of EMU

Real Wage Rigidities, Accommodative Demand Policies, and the Functioning of EMU. — The paper shows that the primacy of politics over economics in the decision to start EMU with eleven countries on January 1, 1999 could have serious consequences concerning the functioning and stability of EMU, in particular during the transition phase. The paper demonstrates empirically that real wages in EMU member countries are highly rigid by international comparison and that demand policies played a considerable role in absorbing adverse shocks in the past. Considering that real wages are unlikely to become much more flexible soon, and taking also into account that the use of demand policies in EMU is severely curtailed, it becomes clear that EMU will face a severe crisis if large asymmetric shocks do in fact occur.ZusammenfassungReallohnrigiditÄten, akkommodierende Nachfragepolitik und das Funktionieren der EWU. — Der Artikel zeigt, da\ die stÄrkere Gewichtung von politischen Zielen gegenüber ökonomischen überlegungen bei der Entscheidung, die europÄische WÄhrungsunion Anfang 1999 mit 11 LÄndern zu beginnen, insbesondere in der übergangsphase negative Auswirkungen auf das Funktionieren und die StabilitÄt der EWU haben kann. Es wird empirisch gezeigt, da\ die Reallöhne in den EWU-MitgliedslÄndern im internationalen Vergleich Äu\erst rigide sind und da\ eine akkom-modierende Nachfragepolitik in der Vergangenheit eine nicht unerhebliche Rolle bei der Abfederung von Schocks gespielt hat. Bedenkt man, da\ die Reallöhne in abseh-barer Zeit kaum nennenswert flexibler sein werden und da\ die Verfügbarkeit der Nach-fragepolitik in der EWU erheblich eingeschrÄnkt wird, so wird klar, da\ es im Falle von grö\eren asymmetrischen Schocks zu erheblichen Spannungen in der EWU kommen wird.

Labor Market Policy in a Global Economy

This paper deals with the much discussed question how to design labor market policy in a global economy. The starting point of the paper is the fact that national unemployment rates differ greatly, which alludes to country-specific institutional factors being the most plausible culprit for rising and lasting unemployment. Hence, identifying institutional setups which promote employment growth is a prerequisite for successfully fighting unemployment. To this end the paper is divided into three main sections. The first section provides a non-technical synopsis of the main causes of persistently high unemployment which can in particular be observed in continental Europe. Special emphasis is put on the question how the ongoing process of globalization of goods and factor markets relates to the rise of unemployment. The by now standard explanation of rising unemployment is a change in the structure of labor demand towards higher skill requirements, be they caused by growing inter-industry trade or skill-biased technical progress, which conflicts with rigid wage structures in continental Europe. However, a number of important shortcomings of this approach are pointed out, which show that this is hardly an encompassing explanation...

The Positive Economics of Labor Market Rigidities and Investor Protection

This paper presents a positive model which shows that institutional setups on capital and labor markets might be intertwined by politicoeconomic forces. Some countries especially in continental Europe exhibit a corporatist politicoeconomic equilibrium with a substantial protection of insiders on both markets. The more important money is in political decision-making, the more divided the workforce is, and the more globalized capital markets are, the more likely is a capitalist politicoeconomic equilibrium with little employment and substantial investor protection. Our prediction of a negative cross-country relationship between labor market rigidities and of competition on capital markets receives considerable empirical support.

Rigide Arbeitsmärkte und ungleiche Einkommensverteilung: Ein unlösbares Dilemma?

Abstract The paper shows that a more flexible labor market is unequivocally necessary for a lasting and substantial reduction of unemployment. It furthermore points out that a more flexible labor market is even beneficial from a long-run distributional point of view. Hence, the key to liberalizing the labor market lies in overcoming widespread short-run distributional concerns. Increasing the short-run elasticity of labor demand with respect to the real wage by fostering venture capital markets appears to be a crucial stepping stone.

Unterentwickelter Risikokapitalmarkt und geringe Beschäftigungsdynamik: zwei Seiten derselben Medaille im strukturellen Wandel?

Abstract Labor market performance has differed considerably between OECD countries over the last two decades. The focus of the literature so far has been to ask whether these differences can be explained by varying degrees of labor market rigidities and generosity of welfare states. This paper takes a different perspective and analyzes whether differences in venture capital investments have explanatory power with respect to labor market performance across countries and over time. In particular, the Anglo-Saxon countries have been relatively successful over the last two decades in producing employment growth and in reducing unemployment compared to most continental European OECD countries. As a rule they have also been and are still ahead in developing thriving venture capital markets that are often deemed crucial for the creation of new firms and for successfully managing the ongoing radical structural change away from traditional industrial production toward the so-called “new economy”.

Arbeitsmarktpolitik in der Europäischen Währungsunion

Abstract While policymakers in Europe were busy implementing EMU during the past decade, persistently high unemployment, which should have been the main policy issue from a normative point of view, was essentially left untackled in most continental European countries. This poses the urgent question of which approach labor market policy should now take in fighting unemployment and which changes have come about with EMU. To deal with this question, the article proceeds in three steps. It is first shown that a web of institutions in labor, goods and capital markets, which are different from those Anglo-Saxon countries and which are interconnected by politico-economic forces, is to blame for the dismal situation on most continental European labor markets. Secondly, it is argued that EMU is not likely to boost employment growth automatically. Thirdly, it is outlined which are the key policy measures to alleviate unemployment in continental Europe and it is discussed whether EMU makes the actual implementation of these measures more likely.