How Firms Decide to Hire the Addtitional Worker

8/6/2019 How Firms Decide to Hire the Addtitional Worker

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Unemployment:Causesand

Consequences

ReviewQuestionsandProblems


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Fullinformation,marketclearingcompetitivelabour

market

model

of

some,

but

limited,

usefulness

in

understandingunemployment

unionwagebargainingcanexplainsome

unemployment,

as

can

labour

market

policies

(e.g.

UI) sharingandincentivepayreasons:seemodelsofimplicitcontractsandefficiencywages

ns erouts ermo e s,anot erpotent a sourceo highwageunemployment,sharefeaturesofunionwagebargaining


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Traditionaltodistinguishbetweencyclical(deficientdemand)andnoncyclical (equilibrium,NAIRU,ornaturalunemployment)

Cyclicalstudiedinmacro,noncyclicalmoremicrobased

Noncyclicalincludesfrictional,structuralandseasonalunemployment

marketpolicies(e.g.UI),institutionalrigidities,highwagesources,andsectoral shiftsleadingtomismatchbetweenlabourdemandandsupply

Mismatchmayoccuralongregional,occupational,industrialandskilldimensions


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Frictionalunem lo mentrefersto

unemploymentassociatedwithnormalturnoverinthelabourmarket

information,leadingtosearchandmatching

function Unemployedworkersareimperfectlyinformed

aboutavailabilityofjobsandassociatedwages

Employerswithjobopeningsalsouninformedaboutavailableworkersandtheircharacteristics


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Gooddiscussionofbasicsintext

Modeledasaproblemofchoiceunderuncertainty Unemployedfaceadistributionofpotentialwages

(andworkingconditions) obtainingdrawsfromthisdistributionrequirestimeandmoneycosts

andcosts

Likelythatexpectedbenefitsdisplaydiminishing

returnswithsearchduration,andcostsincreaseatthemarginwithsearchduration


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marginalPVofexpectedbenefitsequalsmarginalcosts(riskneutralcase)

Associatedwithoptimalamountofsearchis

anexpectedsearchduration Undercertainconditionsoptimalsearchhasa

simplestoppingruleform:searchuntiloffered

wageatleastequalssomeminimumvalue(oftencalledthereservationwage)


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Generall obseekerswillceasesearch riortobein

fullyinformedaboutjobopportunities Unemployedworkersandunfilledvacancieswillcoexist

nequ r um

Distributionofwages(andpossiblyworkingconditions)

workersandjobs

Thussomeemployerspayaboveaverageandsome

belowaveragewagesinequilibrium Situationcanbemodeledasdynamicmonopsony,i.e.


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FrictionalorStructuralUnemploymentFrictionalorStructuralUnemployment

Chapter18 2007McGrawHillRyersonLtd. 9


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EvidenceonSearch

Unemployment Fairamountofonthe obsearch about5%ofthose

employed Especiallyprevalentamongthoseemployedparttime

Contactingemployersdirectlytypicallymostcommonsearchmethod

,

Increasinguseofinternetsearch

overtimeasasearchmethod


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Chapter18 2007McGrawHillRyersonLtd. 11


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Processofeconomic rowthinvolvescreative

destruction somefirmsandsectorsdeclinewhileothersexpand

Growthandsectoral shiftsmayarisefrom

technologicalchange,shiftsinlocationofpro uc on,an c anges npro uc eman

Processofadjustingtochangerequiresre

decliningtoexpandingsectors


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Empiricallyimplementedusingvarianceofemploymentgrowthacrossindustries(orregions)asadditionalcovariateinunemploymentrateequation

fluctuationsduetoeconomicshocks,assome

industries

more

cyclically

sensitive

than

others

Canadiandatausingregionalvariationinemploymentgrowth(seetext)

v ence or ot ana aan t at nter n ustry

mobilityoflabourdeclinesindownturns,incontrasttosectoral shiftshypothesis


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DWsarethosewhoworkedforanem lo er or

inanindustryoroccupation)forsometime(e.g.3years)andwhopermanentlylosetheirjob

Considerableamountofrecentresearchon

consequencesofdisplacementandpoliciestoea w sp acemen

Needlongitudinaldatatoobserveconsequences

,

wageinnewjob,otheroutcomes


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Incidence of ermanent ob loss

Recent study by Morissette et al 2007 covers period-

Administrative data from Stat Can Longitudinal WorkerFile

Permanent layoff rates for men range from 6%-7% in

boom years to 9% in 1990-92 recession Comparable rates for females much lower 3%-4% in

good times, 5%-6% in downturns

Displacement due to mass layoffs or firm closure: annualrates range from 1.1% to 2.4% for males, 0.6% to 1.1%for females


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Earnin s losses from dis lacement: US evidence

Key findings of many studies:

verage earn ngs osses are su s an a

Losses are greatest for long tenure employees

Losses persist much longer than for other unemployed

workers


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aco son, a on e an u van s u y odisplaced workers in Pennsylvania

administrative data linking workers and firms, severalyears of pre-displacement and post-displacement-,

Focus is on workers with 6 or more years of tenure with

em lo er

Losses were very large: 24% of expected earnings even5 years after displacement

Relative earnings losses of DWs began about 3 yearsprior to separation


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Farber (2005) analyses data from over 20 years of DWS

coverin 1981-2003

In most recent period, 35% of DWs are not re-employed3 ears later

About 13% full-time job losers are re-employed part-time

Full-time job losers re-employed in full-time jobs earn

17% less than earnings without displacement

Average earnings loss increases dramatically with priorjob tenure


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Earnin s losses: Canadian evidence from LWF

Morissette et al 2007 find substantial and long-lasting

Focus is on DWs aged 25-49 with at least 5 years of jobtenure

As in Pennsylvania study, earnings start to decline

before displacement Earnings recovery after sharp decline at displacement is

modest

5 years after displacement, earnings losses among high-seniority DWs are 25% -35% for men and 35% forwomen


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Earnings losses: Canadian evidence from

period19932004,espolderworkers

permanentjobloss

Seniorit is the ma or redictor of size of lossagedoesntplaymuchofarole

Relative to revious earnin s losses are lar er

amongloweducatedandthoseinruralareas


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Reasons why standard estimates may under-state

osses

Most estimates com are earnin s rior to dis lacement

to earnings in the new job among those who obtain re-employment

However, those who are not re-employed by the survey

date may do even worse Pre-displacement earnings may under-estimate normal

earnings

The event that leads to displacement shows up indeclining earnings up to 3 years prior to displacement


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Reasons wh estimates ma over-state losses

Layoffs and lemons downsizing firms may selectivelylay off least productive (Gibbons and Katz, 1991)

Doesnt apply to plant shutdowns, and unlikely to apply

to mass layoffs


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What ex lains lar e earnin s losses?

Loss of firm-s ecific or industr -s ecific human ca ital

JLS (1993) and Neal (1995) find that those who changeindustries after ob loss suffer much reater losses

Internal labour markets and wage profiles that depend

on seniorit wa e < roductivit earl in career wa e >productivity later in career)

Loss of economic rents Kuhn and Sweetman 1998

find losses larger for U-N transitions than for N-U or U-Utransitions


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Ke role of ob tenure

Figure 2 evidence from State of Washington (JLS,

Long tenure group distinctive:

Morissette et al find earnings losses for entire sample of

DWs small (approx zero 3 years after displacement)

Large and persistent earnings losses only experiencedby long tenure DWs


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Other conse uences of dis lacement

Dis lacement leads to a 15%-20% increase in death

rates (Sullivan and von Wachter 2008) E uivalent to a reduction in life ex ectanc of about 1.5

years for someone displaced at age 40

Parental job loss reduces probability that 15-year oldsproceed to post-secondary education (Coelli, 2005)

Children whose fathers were displaced have, as adults,

lower annual earnings (about 9%) and have higherincidence of EI and social assistance (Oreopoulos, Page,


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Summar and im lications I

Salient and consistent findin : earnin s losses from

permanent job loss are very large for long tenureworkers

These substantial losses appear to be permanent in

nature

Losses are similar in magnitude to other catastrophic

events e.g. having ones house burn down

In contrast, most unemployed workers become re-employed relatively quickly and do not suffer permanent


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Summar and im lications II

Grou that suffers lar e losses from dis lacement is

relatively small Permanent ob loss due to firm closures or mass la offs

constitute about 20% of total layoffs

Workers with 5 or more ears of ob tenure re resentabout 10% of those displaced by firm closures or mass

layoffs


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Summar and im lications III

Private insurance markets for losses associated with

In Canada, publicly provided insurance (EI Part I) isinadequate

EI benefits depend only on employment in 12 monthsprior to displacement

EI onl covers ortion of lost income durinunemployment spell

Similar to having auto insurance that pays same amount

EI benefits are especially inadequate for DWs in regionswith low unemployment rates


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UnemploymentInsuranceand

Unemployment EI(UI)canhavenumerousimpactsonlabourforce

participationaswellasincidenceanddurationof

unemployment

UIaltersincentivesfacingworkersandemployers

Inasimplesearchmodel,UIbenefitsreducethemarginalcostsofsearch,sopredictanincreaseinexpectedduration

ofsearchfrommoregenerousbenefitlevels UIcanalsoincreasetheincidenceofunemploymentby

alteringthenetbenefitsofemployedversusunemployedsearch

Asdiscussedpreviously,UIcanencouragepartyearworkoverfullyearworksopredictanincreaseinseasonalunem lo ment


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UIcanalsoencourageentryintoLFofthoseonthe,

unemployment

(as

well

as

LF

participation) Intheabsenceofexperiencerating,UIbenefitsalso

re uce ecos s o eemp oyero us ng ayo s orespondtofluctuationsinproductdemand(seasonal

orotherwise) Reason:withoutUIbenefits,employersthatfrequently

layoffworkerswouldneedtopayhigherwagestocompensateemployeesforriskoflayoff(compensating

differential) Subsidizing worksharing orintroducingexperience


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Substantialamountofempiricalresearchonimpactof

Severalkeyparameterstoconsider:coverage,eligibility(entrancerequirement),benefitrate,maximum

ura ono ene s

MuchevidencethatCanadasUI(EI)programraises

bothseasonalandnonseasonalunemployment However,importanttokeepinmindthatUIhas

benefitsaswellascosts

benefits,whilereducingunintendedadverseconsequences


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18: , , ,

Problems:

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How Firms Decide to Hire the Addtitional Worker

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