The Global Economy Labor Markets

1. The Global EconomyLabor Markets

2. Barbie and the World Economy • “My First Tea Party” retail price $9.99 • Export value from China: $2 • $7.99 to shippers, retailers, Mattel, … • Did China add value of $2? Nope: • Saudi Arabia: oil -> ethylene • Taiwan: ethylene->Barbie’s body • Japan: nylon hair • U.S.: cardboard packaging

3. Roadmap In the news Measuring labor markets Labor market institutions Dynamics of employment Volatility and labor markets

4. U.S. employment status2011, in millions Unemployed Not in Labor Force Employed Not of working age

5. Standard indicators • Employment rate = employed/(working-age) population • Labor force = employed + unemployed • Unemployment rate = unemployed/labor force • Participation rate = labor force/working-age population • Hours worked = average hours worked of employed people

6. U.S. labor market indicators Labor force = Employment rate = Unemployment rate = Participation rate = Unemployed Not in Labor Force Employed Not of Working Age

7. Employment rate (% of 15-64) Source: OECD, Employment Outlook, 2009.

8. Employment 16-24, 2000-2007

9. Female Employment

10. Unemployment rate (%) Source: OECD, Employment Outlook. Standardized rates intended to be comparable across countries.

11. Official unemployment rate U3 = unemployed labor force

12. Marginally attached • Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. • Discouraged workers are a part of the marginally attached population.

13. Part time for economic reasons • Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

14. Alternative measures (U.S.) U6 = unemployed + marg. attached + part-time f.e.r. labor force + marg. attached U3

15. Unemployment: why? • Institutions • Contracting policy, minimum wages, etc. • Physics • It takes time to match workers and jobs

16. Labor Market Institutions

17. France and the US • Differences are mostly due to labor effort • Can we tie labor effort to institutions? Source: Penn World Tables, version 6.2, and OECD, Employment Outlook.

18. Labor market institutions • Minimum wage • Employment “protection” laws • Industrial relations / trade unions

19. Employment protection laws (EPL) • What are they? • Laws that govern employment contracts • Examples • Duration of contract • Overtime compensation • Layoffs • Dismissals

20. Portugal v New Zealand The World Bank (2006) index of EPL ranks Portugal the highest and New Zealand the lowest Fixed-term contracts PRT Fixed term contracts allowed only in special situations (such as seasonal activity) NZL Fixed term contracts are unrestricted, with no limit on duration period

21. Portugal v New Zealand Overtime PRTMandatory premium for overtime work ranges from 50% to 75%, additional restrictions on night work, and there are 24 days of paid leave per year NZL No required premium for overtime work, no restrictions on night work, and the minimum paid leave is 15 days per year

22. Portugal v New Zealand Dismissal PRT Has a list of fair grounds for termination and stringent procedural limitations on dismissals, such as mandatory notification of the government and priority rules for re-employment of redundant workers. NZL Allows “contracts at will,” which can be terminated with notice without cause Source: Botero, Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2003

23. Industrial relations laws • What are they? • Laws that govern collective bargaining, enforcement of collective agreements, and the organization of trade unions • Examples: • Employers’ duty to bargain with unions • Extension of collective contracts to third parties • Right to strike • Right of unions to appoint company directors

24. Portugal v New Zealand Collective bargaining PRT Employers have a legal duty to bargain with unions, collective agreements are extended to third parties by law, workers councils are mandatory, and employer lockouts are prohibited. NZL Employers have no legal obligation to bargain with unions, collective agreements are not legally extended, labor participation in management is not required by law, and employer lockouts are allowed. Source: Botero, Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2003

25. Rigidity of hours (index) Source: World Bank, Doing Business.

26. Weekly Hours 2005-2007

27. Firing costs (weeks of wages) Source: World Bank, Doing Business.

28. Union rights (index) Source: Botero, Djankov, La Porta, Lopez-de-Silanes, Shleifer, Regulation of Labor.

29. Employment protection and tenure Source: Bertola, 2001.

30. Minimum wage (ratio to median wage) Source: OECD, employment database.

31. Minimum wages Meant to help low skilled workers Does it?

32. Minimum wage Reuters, Jan 19 2010: Gabon will almost double the minimum wage, its government said late on Monday. … The minimum monthly salary will rise to 150,000 CFA francs from 80,000 francs from the end of February. “Firstly, it will increase the purchasing power of men and women who work in Gabon, and secondly, as purchasing power increases, quality of life increases too,” said Prime Minister Paul Mba. Is this a good idea? Why or why not?

33. Labor market without min wage

34. Labor market with min wage Are we better off? Who’s “we”?

35. Youth unemployment rate France United States

36. Labor Market Dynamics

37. Volatility and employment • Demand for labor is volatile • How does labor market flexibility affect labor market outcomes? • What role do institutions play?

38. Demand for labor (p=K=1) Labor supply Labor demand

39. Labor market turnover • Creation and destruction of jobs by firms • Creation: sum of all increases in number of employees by individual establishments • Destruction: sum of all decreases in number of employees by individual establishments • Changes in job status by workers • Accessions: number of workers taking new jobs, whether their previous status was employed, unemployed, or not in labor force • Separations: number of workers leaving current jobs, whether they become employed, unemployed, or leave labor force • Bottom line from both: enormous turnover

40. Labor market transitions (avg. 93-05) Monthly!(percent relative to source of flow) 2.6% “job-to-job” Employment 122.0m 1.3% 4.8% 28.3% 2.7% 2.4% Unemployment 6.2m Out of labor force 59.3m 23.3% Source: US data, monthly, reported in Davis, Faberman, and Haltiwanger, “Flow approach,” 2005.

41. Transitions in US and EU Source: OECD, Employment Report, 1994; numbers are annual percentages of labor force.

42. Unemployment duration (2000)

47. A Diagnostic Tool: The Beveridge curve 47 vacancies unemployment Unemployment is lower when firms open up more job vacancies Flexible labour markets have curves closer to the axes

48. Role of institutions • An economy with good policies and institutions will have a Beveridge curve close to the origin (less unemployment at given job creation) • It will have a curve that is steep and does not shift out in recession • And it will quickly move up the curve when recovery comes

49. What happens in recession? B • Say an economy is initially at point A. Recession hits, job vacancies decline, unemployment increases. • A well-functioning economy will move to a point like B, smaller rise in unemployment. An economy with rigid institutions will move further out to C A C vacancies unemployment

50. And in recovery? B • When job creation returns, a well-functioning economy will move fast from B to A • An economy that develops structural problems will move out from B, with increasing vacancies but no impact on unemployment for a long time A vacancies unemployment