The Economies of Imperfect
Labor Markets
Boeri, T. & Ours, J. van (2013). The Economies of Imperfect Labor Markets.
2nd Edition. Princeton: Princeton University Press.
Since the great recession of 2008-2009 (un)employment discussions are back on
the political agenda. The progressiveness of taxation, active/passive labour
market policies, protection legislation and minimal wages are just some of parts
of this discussion. Within this book there is a focus on imperfect labor markets in
which employees/employers enjoy rents (scheur/kloof) and hence a job is a big
deal. Furthermore imperfect labour markets include many institutions (result of
political process for efficiency and achievement of redistributive goal).
H1: Overview
Despite the great recession of 2008-2009 and the expectations that ‘nothing will
be like before’ little has changed in labor market teaching. However many
countries experienced high youth unemployment, high unemployment rates in
general and GDP contraction, the effects were different for each country (see
figure 1.1 p. 2).
According to the Eurosclerosis institutional perspective the strict employment
protection legislation in Europe is the responsible entity for the asymmetric
responses to the global shock of 2008-2009 on the two sides of the Atlantic.
These high costs of dismissals (ontslagen) typically involve lower labor market
volatility. However the countries with these employment protection legislation
experience a lower unemployment growth in the first period of a recession, they
experience the greatest unemployment levels at the end of the recession
(especially within temporary contract market).
You need to go beyond the cross-country analysis of labour market institutions to
understand these asymmetric and largely unprecedented developments.
Within country variation of the of labour market institutions caused by: minimum
wage across age groups, sector differences, regional differences in institutions.
The differences in unemployment level growth on the two sides of the Atlantic
(see figure 1.2 p. 4) in the 2008/2009 great recession is caused a difference in
the stock market capitalization as percentage of the GDP. In the US the level of
capitalization is 100% while in the EU the level is 75% of the GDP.
Labor market: a market where a quantity of labor services (L), corresponding to
task specified in an unfilled assignment or job description (vacant job), is offered
in exchange for a price or remuneration, called wage (w). The exchange of a
labor service or a wage is essential here (as we deliver unpaid jobs each day
(cleaning our apartment ect.).
Working age population: According to the OECD-International Labour
Organization (ILO) definition, the entire working age population is between 15
and 65 years old (now changes due to the increased retirement ages).
1. Employed individual (L): someone in the armed forces who has worked
for at least 1 hour during the reference period (day/week), or has a formal
attachment but is temporarily not at work (due to
illness/holidays/pregnancy ect.)
2. Unemployed individual (U): a person at the working age who is willing
to work at the going wage and fulfilled the following five conditions:
a. The person is currently not at work.
1
, b. The person has looked for work in the 4 weeks before the survey.
c. The person has looked for work actively.
d. The person is willing to work.
e. The person is immediately available for work (person can start within
two weeks).
3. Inactive Individual (O): persons who are neither employed nor
unemployed according to these definitions. This is a highly heterogeneous
group, including disabled, voluntary inactive persons (mothers who take
care of their children) and students.
Labor Force (LF): employment (L) + unemployment (U). LF = L + U
Working age population (N): employment (L) + unemployment (U) +
inactive individuals (O)
N = L + U + O Or working age population is labour force + inactive
individuals: N = LF + O
Unemployment rate (u): u = U/LF
Employment rate (e): e = L/N.
Participation rate (p): p = LF/N
Interrelationship of these rates can be rewritten as: e = p(1-u) saying:
employment rate = participation rate x (1 – unemployment rate).
Assuming a fixed labour force, the steady state equilibrium is defined by
the equality of inflows into and outflows from unemployment. If § is the
rate at which workers lose their job and µ is the rate at which workers find
a job. The steady equilibrium can be defined as: §L = µU. From here the
unemployment rate can be defined as: u = § / (µ + §).
Value of the marginal product: the price of the good multiplied by the
increase in output made possible by hiring an additional worker.
The workers surplus (or rent): the difference between the wage
actually earned by the worker and the worker`s reservation wage (w R),
which is the lowest wage at which the worker is willing to accept a job offer
(point at which the worker is indifferent between working and not working).
The workers surplus is given by: w - wR.
The surplus of a firm: the difference between the value of a job (the
revenues of a job) and the costs (the wage paid) of a job. The firm`s
surplus can be written down as: y – w.
The total surplus of a job: the sum of the firm`s and worker`s surplus.
Which is (y – w) + (w – wR) = y – wR. In this last equation the actual wage
cancels out of the total surplus.
o Perfect labour market: a market in which there is no total surplus
associated with the marginal job. This is the market of the total surplus of
a job in which y = w and w = wR and therefore y = wR. in this equilibrium,
employers and workers are indifferent between continuing or terminating
any job relationship. Losing a job or a worker isn`t a big deal in this
situation as these can be found instantaneously without suffering any loss
in profit or well-being reduction.
o Imperfect labour market: markets in which there are rents
(scheur/kloof) related to any given job. Wages are in this context a rent
splitting device, of which one part goes to the employer and a part goes to
the worker. In the imperfect labour market wage setting is therefore of
paramount (hoogste) importance. Due to difference in power, informational
asymmetries or other frictions the positive rent differs in each employer-
employee relationship.
2
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper Herotak. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €11,48. Je zit daarna nergens aan vast.
