Intersectoral Distributional Effects of Deregulation and Privatization in a Closed Economy

Transcription

1 Intersectoral Dstrbutonal Effects of Deregulaton and rvatzaton n a Closed Economy Julus Spatz Kel Insttute for orld Economcs Submtted to Ffth IZA European Summer School n Labor Economcs Aprl 5-2, 2002 Julus Spatz Kel Insttute for orld Economcs Duesternbrooker eg Kel Germany hone Fax e-mal: spatz@fw.un-kel.de

2 Intersectoral Dstrbutonal Effects of Deregulaton and rvatzaton n a Closed Economy Abstract: e develop a smple general equlbrum model of a closed dual economy. he manufacturng sector s modeled wth monopolstcally compettve frms, unon-frm wage barganng, employment protecton and effcency wages. In the tradtonal sector, product and labor markets are assumed to be perfectly compettve. It s shown that all four market mperfectons ontly cause and magnfy ntersectoral wage dfferentals. Snce a) labor market deregulaton reduces unon barganng power and employment protecton, and b) product market deregulaton curbs frms monopoly power, ntersectoral wage nequalty should decrease n the process of deregulaton. In the case of prvatzaton, however, ntersectoral dstrbutonal effects are ambguous due to effcency wage effects. Key ords: Effcency ages, rade Unons, Employment rotecton, Dual Economy, Intersectoral age Dfferentals, Deregulaton, rvatzaton JEL Classfcaton: E25, J3, J4, J5, L6

3 I Introducton Rgdtes n product and labor markets are consdered to be at the root of poor economc performance n many countres. o acheve sustanable economc growth, nternatonal organzatons, such as IMF, orld Bank and OECD, have advocated deregulaton and prvatzaton. here s wdespread consensus that such polcy reforms help restore macroeconomc and fscal stablty. But stll they often lack poltcal support. he key to understandng these poltcal economy constrants s to have a closer look at the dstrbutonal effects of deregulaton and prvatzaton. In ths paper, we focus on the mpacts of a wde range of polcy reforms on ntersectoral wage dfferentals. 2 In Secton 2, we start by developng a smple general equlbrum model of a closed dual economy wth a) mperfect competton n the product market as well as b) unon-frm wage barganng, c) employment protecton and d) effcency wages n the labor market of the manufacturng sector. he mpacts of these market mperfectons on the labor market equlbrum have long been dscussed n the lterature. 3 More recently, the nteractons between these effects have been analyzed. ckell et al. (994) show that monopoly power of frms and barganng power of unons ontly contrbute to ntersectoral wage dfferentals. he lnk between unon-frm barganng and effcency wages as complementary theores to explan sectoral wage prema was explored by See, for example, OECD (994). 2 hat s wage dfferentals whch cannot be explaned by personal characterstcs of the ndvdual worker but whch are due to the sectoral afflaton of her employer. 3 See, for example, ckell (999) and Gersbach (999) on mperfectly compettve product markets, ckell (997) and Sebert (997) on unon-frm barganng and employment protecton, and ess (99) on effcency wages.

4 2 Garno and Martn (2000). By ntegratng all four types of market mperfectons nto a sngle model, we ntend to proceed further on ths path. In secton 3, we apply the model to study the mpacts of deregulaton and prvatzaton on the labor market equlbrum. Followng Blanchard and Gavazz (200), we ntroduce these polcy reforms n a hghly abstract fashon by dscussng ther mpact on those model parameters whch reflect the above mentoned market mperfectons. 4 e then show that product and labor market deregulaton reduce ntersectoral wage nequalty, whle the dstrbutonal effects of prvatzaton are ambguous due to effcency wage effects. Secton 4 concludes. II he Model II. roduct Markets On the producton sde, we assume a dual economy. In the manufacturng sector, J monopolstcally compettve ntermedate good producers make J nputs, whch are subsequently transformed nto one composte manufactured good M by numerous perfectly compettve fnal good producers. he market structure of the tradtonal sector, whch produces the tradtonal good, s also perfectly compettve. he fnal good of the manufacturng sector s produced usng all nputs but no labor accordng to the constant-returns-to-scale CES technology 4 For a comprehensve emprcal survey on the labor market mplcatons of deregulaton see Boer et al. (2000).

5 3 M J J, 0,..., J, >, () where s the absolute value of the elastcty of substtuton between nputs. roft maxmzaton by the representatve fnal good producer yelds her prce-settng rule and her demand for nput J J M, (2) M M J, (3) where M and are the prces of M and. he prce of the manufactured good s set equal to margnal costs so that fnal good producers make zero profts. Input demand s decreasng n nput prces wth an elastcty of ε,, (4) he producton functon of ntermedate good producer,..., J s gven by A E L. (5) Supply of the nput depends on the number of producton workers L, effort E and the level of technology A. Effort s a functon of the wage pad by frm,, relatve to the expected outsde wage Z. Followng Summers (988), we assume E γ Z Z, 0 γ <, (6)

6 4 where the effcency wage parameter γ measures the strength of the relatonshp between wage and labor productvty of producton workers. Addtonally, frm s workforce conssts of F nonproducton workers, who are assumed to receve the same wage as producton workers. Maxmzng frm s profts 5 subect to the nput demand functon of the representatve fnal good producer mples θ. (7) A E A E L ( A E ) M M J, (8) (7) states that ntermedate good producers can set prces as a mark-up θ on margnal costs. Accordng to (8), labor demand s decreasng n wages wth an elastcty of εl ( ), γ. (9) Z.e., In the tradtonal sector, labor productvty of workforce s constant and normalzed to one,. (0) On perfectly compettve product markets, frms set prces equal to margnal costs, whch mples, () 5 he profts of ntermedate good producer are ( L F ) Π.

7 5 where s the wage pad n the tradtonal sector. Frms make zero profts. On the demand sde, consumer,..., solves the optmzaton problem max U { M, } s.t. Y M M M, 0 <, <, (2) wth Y,f s employed, f s employed by ntermeda te good producer n the secondary sector allocatng ncome Y to the consumpton of M and accordng to M M. (3) II.2 Labor Markets he economy s populated wth homogeneous and rsk-neutral workers who supply labor nelastcally. 6 he wage n the manufacturng sector results from negotatons between unons and frms, whereas the labor market n the tradtonal sector s atomstc. 7 In the manufacturng sector, each ntermedate good producer bargans wth a sngle n-house unon n a rght-to-manage set up 8 at the begnnng of each perod. he negotaton partners stake n the wage barganng s the dfference n payoffs between a stuaton wth and wthout an agreement. Unon s assumed to 6 hs s because lesure does not enter the utlty functon U. 7 hs assumpton can be ustfed on the grounds that a) rents only accrue n the monopolstcally compettve manufacturng sector and b) unons can approprate a share of these rents snce labor demand s decreasng n wages. 8 In other words, the two negotaton partners ontly determne the wage, whle the frm unlaterally sets the employment level afterwards.

8 6 represent only frm s producton workers. Upon successful completon of the negotatons, unon gans a rent of ( Z ) Γ L. (4) U Frm s stake n the wage barganng s equal to ts varable profts ( A E ) Γ L. (5) Assumng an asymmetrc ash barganng soluton, the wage s set to maxmze the geometrc average of the negotaton partners rents from reachng an agreement Ω Γ Γ U, (6) where measures workers share n the ash Maxmand Ω and reflects the barganng power of unon. Snce frms can choose employment ex-post, the negotaton partners maxmze the ash Maxmand by choosng the wage equal to 9 θ Z Z. (7) γ he wage s set as a mark-up θ over the expected outsde wage. After the wage barganng s completed, all workers n the economy are dsmssed and obs are newly allocated. Members of unon who are not reemployed by frm expect ether to fnd employment n one of the other J- ntermedate good producers at the average manufacturng-sector 9 See Appendx A.

9 7 wage gven by or to have to work n the tradtonal sector at. he expected outsde wage s, thus, ( prob( ) Z prob( ) ), (8) where prob ( ) s the condtonal probablty that a unon member0 stays n the manufacturng sector. e model the mpact of employment protecton on the expected outsde wage ndrectly by assumng that ex-manufacturng-sector workers have better chances of fndng employment n the manufacturng sector than ex-tradtonal-sector workers,.e., prob ( ) prob( ), >. (9) Combnng (8) wth (9) yelds 2 Z ( ) ( ). (20) II.3 General Equlbrum e consder a symmetrc equlbrum n whch all consumers have dentcal preferences, and n whch unon barganng power, the effcency wage parameter, the level of technology and the number of 0 hat s, a worker prevously employed n the manufacturng sector. e choose to model employment rather than dsmssal probabltes because they are easer to handle algebracally. Another factor contrbutng to the asymmetry between the two groups of workers s sectorspecfc human captal. 2 See Appendx B.

10 8 non-producton workers are equal for all ntermedate good producers. 3 here are no admnstratve barrers to market entry for ntermedate good producers 4 and the economy s assumed to be closed. Usng these equlbrum condtons and collectng terms, we arrve at 5 ω: γ, (2) γ η : η ( γ ), (22) γ where ω s the relatve sectoral wage level and η the employment share of the manufacturng sector. II.4 Dscusson he labor market equlbrum depends on the four market mperfectons captured by the model parameters,, γ and. Absent any market mperfectons, 6 manufacturng-sector workers do not receve a sectoral wage premum ( ω ) sector s equal to the budget share spent on good M ( η )., and the employment share of the manufacturng 3 hat s,, and, γ γ, A A, F F J. 4 Hence, the rents earned by the ntermedate good producers ust cover ther fxed costs, and ther profts are zero, too. 5 See Appendx C. 6 hat s,, 0, γ 0 and.

11 9 If we allow for monopolstcally compettve ntermedate good producers ( < < ) and unon barganng power ( > 0), we have got a standard wage barganng model. Frms and unons bargan over the rents earned n the manufacturng sector. he sze of the rents s determned by the degree of monopoly power of ntermedate good producers. he lower the prce elastcty of nput demand, 7, the hgher the prce mark-up θ and the rents earned n the manufacturng sector (see (8)). he dstrbuton of the rents between workers and frms depends on the unon barganng power. he hgher the share parameter, the hgher the proporton of rents gong to workers and the hgher ther wage mark-up θ (see (7)). Consequently, the sectoral wage premum s decreasng n and ncreasng n. It follows from (2), (7) and (3) that hgher wages n the manufacturng sector feed nto hgher prces of, and lower demand for the manufactured good M. herefore, the employment share of the manufacturng sector s ncreasng n and decreasng n. he effcency wage parameter γ enters the model n two ways. If ntermedate good producers determne the wage unlaterally ( 0), the model converges to the standard effcency model n whch wages are set accordng to the Solow condton. 8 If effcency wages and unon-frm wage barganng coexst ( 0 < < ), the nteracton between the two market mperfectons has to be consdered, too. 9 Frst, effcency wage effects make the varable profts of ntermedate good producers less senstve to wages. 20 hs s because effort s ncreasng n wages so that the costs of 7 As shown n equaton (4), the prce elastcty of nput demand s equal to the elastcty of substtuton between nputs. 8 hat s, n equlbrum, wage elastcty of effort, ε E, γ Z, s unty. 9 For a more detaled dscusson refer to Garno and Martn (2000). 20 he wage elastcty of varable profts s ε ( ) ( ε ) Γ, E,.

12 0 a pay rse are offset by hgher output. As a result, ntermedate good producers are more wllng to make concessons n the wage barganng. Second, effcency wages reduce ntermedate good producers wage elastcty of labor demand, thereby, easng the trade-off between wages and employment faced by the unons. 2 Unons, thus, push harder for a pay rse. he stronger the relatonshp between wage and labor productvty, the stronger are the two effcency wage effects. Hence, the sectoral wage premum s ncreasng n γ. For the reasons dscussed above, the reverse holds true for the employment share of the manufacturng sector. Fnally, the degree of employment protecton,, works through ts effect on the dsagreement pont n the wage barganng. he hgher unon members probablty of beng reemployed n the manufacturng sector, the hgher s, ceters parbus, ther expected outsde wage (see (20)) and, thus, the sectoral wage level of the manufacturng sector. Consequently, ω s ncreasng, and η s decreasng n. able summarzes the comparatve-statc effects of changes n,, γ and on the labor market equlbrum. Intersectoral wage dfferentals and the contracton of manufacturng-sector employment are ontly caused and magnfed by all four market mperfectons. able Comparatve-statc Effects of arameter Changes on the Labor Market Equlbrum γ ω - η he wage elastcty of unon rents s ε Γ, εl,. U Z

13 III Introducng Deregulaton and rvatzaton nto the Model Havng characterzed the labor market equlbrum, we can now turn to the dstrbutonal effects of deregulaton and prvatzaton. Followng Blanchard and Gavazz (200), these polcy reforms are ntegrated nto the model n a hghly abstract fashon. By product market deregulaton we understand all those polcy reforms that ncrease the degree of competton n the manufacturng sector, such as the reducton of admnstratve market entry barrers and tougher anttrust enforcement. 22 hey are captured n the model by an ncrease n the absolute value of the elastcty of substtuton between nputs,. Labor market deregulaton has an mpact on two model parameters. Frst, weakenng extenson agreements and closed-shop arrangements, restrctng the rght to strke, and other measures to curb unon barganng power are reflected n a reducton of the share parameter. Second, measures to reduce employment protecton, such as cuttng the legal perod of notce, and lowerng redundancy payments and other admnstratve dsmssal costs, are modeled by a reducton of parameter. Introducng prvatzaton nto the model s slghtly more complex. Frst, the mpact of prvatzaton on the degree of competton n product markets s ambguous. On the one hand, Haskel and Szymansk (993) argue that a shft from publc to prvate ownershp changes the obectve functon of the prvatzed entty. ublc companes are thought to pursue the nterests of all stakeholders,.e., captal owners, consumers and trade unons, whle prvate frms confne themselves to proft maxmzaton. Consequently, prvate frms should abuse market power to a greater extent than publc 22 In an open economy model, we would also nclude the reducton of barrers to trade and foregn drect nvestment.

14 2 companes. On the other hand, prvatzaton s often accompaned by product market deregulaton. hs s done by replacng state monopoles by compettve market structures and by phasng out other types of admnstratve nterference n the market. Furthermore, when balancng the nterests of consumers and producers, regulators tend to favor producers n the case of publc companes, but consumers n the case of prvate frms. Hence, anttrust rules tend to be more strctly enforced after prvatzaton. For these reasons, the mpact of prvatzaton on s undetermned. Second, prvatzaton often goes hand n hand wth de-unonzaton and the weakenng of ob securty. Both unon densty and co-determnaton are usually hgher n publc companes than n prvate frms. Consequently, prvatzaton can be modeled as a reducton n. 23 Furthermore, publc employees frequently enoy preferental treatment wth respect to dsmssal protecton snce a) soft budget constrants n the publc sector prevent mass layoffs n the frst place, b) the legal rules governng the dsmssal of publc employees are more strngent, and c) ther applcaton s more strctly enforced. Hence, prvatzaton should reduce. hrd, prvatzaton also nfluences workers decson to provde effort. hle publc companes tend to base remuneraton and dsmssal protecton manly on the prncple of senorty, prvate companes are more lkely to use a carrot-and-stck approach. On the one hand, they offer performance related pay and fast-track careers for hgh achevers. On the other hand, they use close montorng to prevent shrkng. 24 rvatzaton should, thus, strengthen the relatonshp between wage and labor productvty. In other words, γ should ncrease. 23 See, for example, Haskel and Sanchs (995). 24 See Goerke (998).

15 3 he mpacts of deregulaton and prvatzaton on the degree of market mperfectons n product and labor markets and on the labor market equlbrum are summed up n able 2. In the case of product and labor market deregulaton, the dstrbutonal effects are clear cut. Deregulaton reduces the sectoral wage premum and expands manufacturng-sector employment ether va an ncrease of product market competton or va a decrease of unon barganng power and employment protecton. In the case of prvatzaton, however, the dstrbuton effects are ambguous. Frst, the mpact of prvatzaton on the degree of product market competton s undetermned. Second, the fall n unon barganng power and employment protecton s offset by the rse n the effcency wage parameter. As a result, dependng on the strength of the varous partal effects, the sectoral wage premum and the employment share of the manufacturng sector ether grow or declne. able 2 Impact of Deregulaton and rvatzaton on roduct and Labor Markets Deregulaton of roduct Markets Deregulaton of Labor Markets rvatzaton? - - γ - - ω - -? η? I Conclusons In ths paper, we developed a smple general equlbrum model of a dual economy wth monopolstcally compettve frms, unon-frm wage barganng, employment protecton and effcency wages, and appled t to dscuss the dstrbutonal effects of a wde range of polcy reforms. he model predcts that n the case of product and labor market deregulaton, workers n the

16 4 manufacturng sector lose n wages relatve to workers n the tradtonal sector. In the case of prvatzaton, however, they may ether gan or lose. Snce workers n the manufacturng sector tend to be relatvely well-organzed, poltcal pressure s more lkely to mount aganst deregulaton than aganst prvatzaton. hs result offers a possble explanaton of why many countres have made consderable progress n prvatzng publc companes but have got stuck wth ther product and labor market reforms.

17 5 Appendx A he negotaton partners solve the followng program s.t. max Ω { } Γ Γ U Γ L L U Γ, ( Z ), ( A E ). (A) he frst order condton for the optmal wage reads ε ΓU, ε Γ (A2), wth εγ ( ) U, γ, (A3) Z Z ( ) ε Γ, γ (A4) Z beng the wage elastctes of the unons and the frms stake n the negotatons. Substtutng (A3) and (A4) nto (A2), we obtan θ Z Z. (7) γ

18 6 Appendx B In equlbrum, the number of manufacturng-sector obs s equal to the number of ob applcants from both sectors weghted by ther respectve employment probabltes,.e., ( ) ( ) ( ) prob prob. (B) Insertng (9) nto (B) yelds ( ) ) ( prob. (B2) Usng (B2), equaton (8) may be wrtten as ( ) ( ) Z. (20)

19 7 Appendx C It s straghtforward to show that n a symmetrc equlbrum, wage, prce, demand and labor demand L are equal for all ntermedate good producers. Usng these results, we obtan the mplct labor demand functon of the manufacturng sector AE (C) from equaton (7), and the mplct labor supply functon of the manufacturng sector γ γ (C2) by nsertng (9) nto (20). Combnng (C) and (C2), t s possble to derve the relatve supply of the manufactured good ( ) γ γ AE M. Insertng (C3) nto (3) yelds the relatve prce of the manufactured good ( ). : AE γ γ ϕ (C4) Substtutng (C4) and () nto (C), we arrve at

20 8 γ γ ω :. (2) Gven equaton (C4), t s also straghtforward to solve for ( ) γ γ η η :. (22)

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