Labor Economics. Introduction, concepts and stylised facts. Pierre Cahuc/Sébastien Roux. ENSAE-Cours MTPE. October 31st 2007

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1 Labor Economics Introduction, concepts and stylised facts. Pierre Cahuc/Sébastien Roux ENSAE-Cours MTPE October 31st 2007 Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

2 Introduction Specificities of the Labor market with respect to other markets Imperpect competition (Monopole or monopsone) Information asymetries Frictions Central field in the economic analysis, major social and politic question Here, an economic approach. Others are possible : juridic, sociological, psychological,... Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

3 Adam Smith, 1976 : Explain the wage differences, interpreted as productivity differences. Classic representation of demand and supply. Remarks : 1 Coalitions and strategic manipulations can trouble this representation. 2 At that time, unemployment is not an issue, wages are. Marshall, 1890 : Marginalist Theory. Wage is the price that sets the equilibrium between demand and supply, equilibrium notion crisis : mass unemployment emerges. Keynes, express doubts about the representation of the labor market in terms of instantaneous equilibrium adjustments. Chamberlin, Joan Robinson : introduce notion of imperfect competition in Labor Market From 1940, more descriptive approaches (Dunlop, Kerr, Reynolds) : examination of institutional specificities to understand labor markets mechanisms. Since the end of the 60ies, progressive integration of the economic theoretical advances into labor economics. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37 Rapid history Introduction

4 Some concepts Some Definitions Occupied Active population : Working people aged 15 or more, who furnish the supply of labor for the production of economic goods and services during a specified time reference period. It includes employees, self-employed or people helping their family when involved in an economic activity. ILO Unemployment : All persons who, during a time reference period were 1 without work, i-e, not in paid employment or self-employment. 2 currently available for work 3 seeking work International Labour Office Definition. Active Population : Sum of the occupied active population and ILO Unemployed. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

5 The classical model Some concepts A very simple model : One produced good y, work and money, the numeraire. y t : log of the aggregated production m t : log of money supply p t : log price indexes Equilibrium on good s market : y t = m t p t (1) Production technology : y t = a t + l t (2) where l t is the log of the number of workers and a t is the log of productivity. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

6 Some concepts The price is set by firms under imperfect competition : p t = w t a t + χ (3) where w t is the log wage, and χ is the mark-up (which depends on monopoly power). From the clearing on good s markets, we can express the labor demand as a function of the good s price : Household labor supply : η the elasticity of labor to the real wage. l t = m t p t a t (4) l S t = N t + η (w t p t ) (5) Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

7 Some concepts When labor market clears, the labor supply and demand equalize l t = l S t = l t Hence, at equilibrium : Remarks : l t = N t + η (a t χ) pt = m t lt a t wt pt = a t χ The real wage is proportional to productivity Note that this classical model is beyond the more simple model of pure and perfect competitions, it only requires that wages clear the labor market. There is no unemployment (in the ILO definition). Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

8 Some concepts Which theoretical reasons to unemployment? Economic definition of unemployment : U = lt S l t 1 Cyclical unemployment : related to nominal rigidities in presence of real rigidities. Wages can not instantaneously clear the labor market, cf. Philips curve. This unemployment type is very related to the monetary policy. 2 Structural unemployment : related to real rigidities (Philips curve), when wages cannot adjust on the long term. It is related to a mismatch between people s skills and the requirements of the firms. The existence of a high minimum wage may create such rigidities. 3 Frictional unemployment : corresponds to the time spent between two jobs. It is compatible with full employment and is not related to wage rigidities. 4 Marxian unemployment : Unemployment as an incentive device. The threat of unemployment may be a way to incentive workers to produce a good work, cf. Shapiro and Stiglitz (1983) for a formalization of this idea under information asymmetry. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

9 Some concepts How do we measure employment and unemployment? A brief description of the French statistical measurement system. Two major types of data : Administrative sources : social system require precise informations on firms for administrative reasons, use of these informations for statistical purpose. ACCOSS : number of employees (every trimestre) ANPE : number of unemployed asking for a job (every month) DADS : number of employees and annual wages (every year) Survey sources : Insee or other statistical agencies directly collect information from economic agents (firms, individuals or households) Census (information on employment not enough fast renewed) Labor Force Survey (households, yearly information on ILO unemployment) Firms surveys, ESS, REPONSE,..., qualitative and quantitative information on firms employment and wage policies Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

10 Stylized Facts Some orders of magnitude for France Whole population Men Women Active Population Activity Rate (15-64 ans) 69.1% 74.5% 63.8% Activity Rate (50-64 ans) 63.6% 54.6% Occupied Active Population Unemployed Unemployment Rate 9,83% 8,96% 10,83% Source : Insee, Labor Force Survey 2005 Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

11 Stylized Facts Evolution of the unemployment rate over a century Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

12 Stylized Facts Unemployment rate over the last 30 years (1) Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

13 Stylized Facts Unemployment rate over the last 30 years (2) Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

14 Stylized Facts Decomposition of the unemployment rate evolution N t : Working age population (15-64 years) A t : Active Population a t : Activity or Participation rate L t : Occupied Active Population U t : Unemployed u t : Unemployment rate A t = a t N t a t N t = A t = L t + U t = L t + u t A t Hence L t u t = 1 a t N t u t = L t + L t 1 a t + L t 1 N t a t N t a t N t a t 1 N t a t 1 N t 1 Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

15 Stylized Facts Correlation Unemployment Rate-Employment Rate Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

16 Stylized Facts Correlation Employment Rate-Activity Rate Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

17 Stylized Facts Correlation Unemployment Rate- Long-term Unemployment rate Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

18 Stylized Facts Unemployment Rate and individual characteristics Unemployment Rate with respect to gender and age (%) Whole population 8,8 9,8 9,9 9, years 14,7 16,7 17,4 17, years 7,5 8,2 8,3 8,3 50 and more 6,5 7,2 7,1 6,7 Men 7,8 8,8 9,0 9,0 Women 10,1 11,0 11,0 10,8 Unemployment rate with respect to education (%) Without diploma or 13,6 14,8 14,8 15,0 CEP BEPC, CAP or BEP 8,4 9,1 9,3 9,3 High-School Diploma 8,3 8,7 9,6 9,2 College 5,6 6,1 6,3 6,6 University or Master 6,4 7,6 7,5 7,0 Unemployment rate with respect to occupation (%) Manager 3,6 4,1 4,8 4,9 Intermediate profession 4,3 5,0 5,9 5,5 White-collar worker 8,8 9,1 10,2 10,3 Blue-collar worker 9,9 10,9 12,3 12,5 Source : Labor Force Survey 2005 Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

19 Stylized Facts Unemployment rate per diploma Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

20 Stylized Facts Wages and Labor Costs (1) Source : Eurostat, in Données Sociales Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

21 Stylized Facts Wages and Labor Costs (2) Source : Eurostat, in Données Sociales Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

22 Labor Costs differences Stylized Facts Source : Eurostat, in Données Sociales Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

23 Stylized Facts Differential Labor Cost-Added Value Source : Eurostat, in Données Sociales Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

24 Stylized Facts From wages to labor costs Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

25 Stylized Facts Evolution of social contributions Source : Eurostat, in Données Sociales Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

26 Wage determinants Stylized Facts Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

27 Yearly Working Time Stylized Facts Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

28 Job Flows and Worker Flows Job Flows and Worker Flows The theoretical framework presented above may be not sufficient to account for important features of the labor market. Vacancies : symmetric concept of unemployment for firms. Firms can have empty workplaces because there are no applicants. Job flows : in some sectors of firms employment increases and in others, it decreases. This is the sign of the existence of frictions on labor market, that have to be accounted for. Worker flows : simultaneously, some workers loose their jobs although unemployed find a job. All these concepts are connected with each other and have been at the origin of the emergence of the matching models, which account for frictions on the labor market. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

29 Job Flows and Worker Flows Vacancies : Measurement issues Vacancies in firms measured with difficulties (Does every hiring correspond to the opening of a vacancy?). This is merely an economic concept whose statistical traduction is problematic. Two ways to collect these informations Administrative sources : A public agency gathers all job offers. Most often, these agencies aim at reducing unemployment, they don t bother about rapidly fill jobs offers that they don t know about. (cf. ANPE for France) Surveys to firms : Directly asking firms about their job vacancies and their durations. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

30 v Beveridge Curve Job Flows and Worker Flows Relationship between vacancies and unemployment 1.4 USA 1.6 Finland v v v u u 1.8 Sweden 1.4 United Kingdom u u Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

31 Job Flows and Worker Flows Job Flows and Worker Flows Concepts and Measurement Job Flows : Job creations and destructions. Measure : net variation of labour force within firms. Job creations : JC = L L>0 Job destructions : JD = L L<0 Job reallocations : JC + JD All these quantities are to be related to the whole employment level (often Lt+Lt+1 2 ) Worker Flows : Mobility of workers between firms. Job to unemployment and unemployment flows Job to job flows Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

32 Job Flows Measures Job Flows and Worker Flows Job reallocation rate OCDE Duhautois Picart (1996) (2002) (2006) Manufacturing Establishments US 8.2% 7-8% 9% FRA 6% Firms FRA 7-8% All Sectors Establishments US 14% FRA 7-8% Firms FRA 10.4% 10% Source : Picart, Require Firm or Establishment data (can also be computed on sectors). The larger the surveyed entity is, the less job flows are counted. Measure of job flows related to the implicit definition of a job, its economic significance being not available in the data. Depends also on the definition of a firm. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

33 Job Flows and Worker Flows Description of worker flows Inactivity Unemployment Unemployment to job flows Job to Unemployment flows Firm A Firm B Job to job flows Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

34 Job Flows and Worker Flows Workers Flows Measures Based on individual longitudinal data : Labor Force Survey. Source : Amossé, Limit : weak information on infra-annual mobility (now quarterly) Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

35 Job Flows and Worker Flows From the firm s point of view... Infra-annual hires and departures from establishments (+50 employee) : DMMO. Information with respect to the proposed contract. Gives the magnitude of job flows with respect to different motivations. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

36 Job Flows and Worker Flows Relations between job flows and worker flows Abowd Corbell Kramarz (1999) : One annual job creation characterized by hiring three persons and separating two, one job destruction by hiring one person and separating two (valid only for large establishments, +50, using DMMO). Picart 2007 : Use of the DADS, day per day entries and exits. Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37

37 Course s Map Course s Map 1 Introduction (SR) 31/10 2 Job search (PC) 07/11 3 Job search and optimal unemployment insurance (PC) 14/11 4 Job search and labor market equilibrium (SR) 21/11 5 Job creations, job destructions and unemployment : the matching model (PC) 28/11 6 Employment protection (PC) 05/12 7 Evaluation of labor market policies (SR) 12/12 8 Reglementation of working time (SR) 19/12 9 Flexicurity (PC) 09/01 10 Minimum wage, employment and welfare (PC) 16/01 11 Discrimination on the labor market (SR) 23/01 (8h30-10h30) 12 The consequences of immigration (SR) 23/01 (16h30-18h30) Pierre Cahuc/Sébastien Roux (ENSAE) Introduction, concepts and stylised facts October 31st / 37