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Modelling Labour market in CGE

Modelling Labour market in CGE. MIRAGE Prospective Hugo Valin – Cristina Mitaritonna FP6 MODELS – Brussels, September 10 th -11 th , 2007. MIRAGE and Labour Market. Secondary focus for a trade policy model A recent topic of research for MIRAGE (modelling in perfect mobility market till 2004)

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Modelling Labour market in CGE

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  1. Modelling Labour market in CGE MIRAGE Prospective Hugo Valin – Cristina MitaritonnaFP6 MODELS – Brussels, September 10th-11th, 2007

  2. MIRAGE and Labour Market • Secondary focus for a trade policy model • A recent topic of research for MIRAGE (modelling in perfect mobility market till 2004) • An approach linked to GTAP data • Research on this topic for 2008 agenda

  3. Outline • What has been done so far with MIRAGE on labour market ? • How do we consider possible improvements ?

  4. Labour supply in MIRAGE • Data from GTAP 6.2 (2001): For the 96 regions × 57 sectors, unskilled and skilled remuneration • Exogenous and constant for each year • Recursive dynamics : growth rate = UN projections for skilled and unskilled

  5. Labour demand in MIRAGE • Production functionincluding nested CES for complementarity betweenskilled and capital (0.6) • Unskilled and other factors( = 1.1) • Equilibrium: Supply = Demand No unemployment;

  6. Labour mobility • Standard = perfect mobility across sectors • Standard = no mobility across regions • Option  UE disaggregated with integrated labour market • Dual labour market: introducing segmentation between rural and urban sectors

  7. Dual labour market in MIRAGE(Bouët et al, 2005) • Developed countries: • Introducing rigidity: Constant Elasticity of Transformation function ( = 1.1) • Limitations: distortion around an equilibrium value • Developing countries: • Exogenous minimum wage in urban employment (ie Industry services) • Perfect market in rural employment (ie Agriculture) • Lewis hypothesis: agricultural migration is balanced by local recruitment

  8. The problem of wage heterogeneity • Usually in the model, reallocations are in dollars • But in real world, wages are different, reflecting different productivities • Productivity is a very delicate issue • 3 agricultural workers destroyed  how many services workers ? • Testing with dual labour hypothesis: very sensitive for GDP and would have effects if modelling unemployment

  9. Other concerns • Labour reallocation: should it be perfect ? How fast ? (ex. of fast-growing economies) • Difficulties to establish a correspondence between rural and urban GTAP sectors for most countries • Taking into account migration between rural and urban reservoirs • Exogenous labour supply: how to take into account education ? (ILO)

  10. MIRAGE: Other features • Interaction income-saving-consumption: • fixed ratio of saving • LES-CES demand function (minimum consumption) • Institutional account : nothing specific on labour • Fiscal policy: no explicit representation of taxes on labour • No human capital creation (exogenous transformation for recent study)

  11. What has been tried in other trade policy models ? Van der Mensbrugghe (2006): effect of labour hypothesis on results in liberalisation Very high sensitivity in GDP and Welfare effect depending on hypothesis • Perfect mobility • Migration function (Harris-Todaro, 1970) • Salary wedge • Minimum wage

  12. Maechler and Roland-Holst (1995) • Single country. Tested a lot of assumptions • Minimum wages (global or sectoral) • Efficiency wage and monitoring scheme • Transaction cost • Differential wages • Job search and match • “While theoretical work like that reviewed here can and has produced important insights, the authors argue persuasively that only detailed, case by case, empirical work will elucidate the workings of real labour markets and policy intervention.” (OECD Development Centre, 1995)

  13. Our team orientation • Minimum wage: not relevant for European market • Wage curve (Blanchflower et al, 1995): macro basis  micro foundation • Rigidity on salary for unemployment modelling • Explicit micro-based modelling with a bargaining model  Unemployment (wage ?) • Relevancy to combine with wages differences (what method for equilibrium ?) • Necessity to characterize each country institutional and legal design

  14. Rigidity on salary • Bargaining model appears particularly relevant: • ~80% of collective bargaining for wages in EU (OECD, 1990) • High heterogeneity: Germany = 90%; UK = 47%; (Japan = 23%; USA = 18%) • Different assumptions • Simple rent-sharing • Monopoly union approach: wage only • Efficient bargaining model: 1) wage 2) employment • Manning-like approach: combination

  15. Labour mobility rigidities • How fast to reallocate ? Fixed cost for recruitments and training • Function of transaction cost Different approaches: • Linear costs (Maechler) • Quadratic costs (Eisner and Strotz) • Pfann et Palm (1993):

  16. What approach for MIRAGE ? • Privileging what labour market aspects are most related to trade policy assessments • First directions of research: • An explicit modelling with centralized wage bargaining approach • Possibly combined with wage differential • Eventually, if data available: adjustment costs • High dependency on data availability • To be defined more precisely at the beginning of 2008 and in confrontation with other methodologies and common orientations

  17. Thank you for your attention…

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