We develop an equilibrium theory of credit rating in the presence of rollover risk. By in uencing... more We develop an equilibrium theory of credit rating in the presence of rollover risk. By in uencing rational creditors, ratings a ect sovereigns' probability of default, which in turn a ects ratings. In equilibrium, credit rating is pro-cyclical and magni es underlying market conditions. Moreover, biased incentives of credit rating agencies are ultimately self-defeating a bias toward issuers makes sovereign debt more risky.
In most European countries, money wages are given in collective agreements or individual employme... more In most European countries, money wages are given in collective agreements or individual employment contracts, and the employer cannot unilaterally cut wages, even after the expiration of a collective agreement. Ceteris paribus, workers have a stronger bargaining position when they try to prevent a cut in money wages. If inflation is so low that some money wages have to be cut, workers' stronger bargaining position requires higher unemployment in equilibrium. However, inflation is more stable when money wage rigidity binds, providing an incentive for monetary policy makers to choose a low target for inflation, which is easier to fulfil.
How will the commitment to price stability affect labour market rigidities in the European Moneta... more How will the commitment to price stability affect labour market rigidities in the European Monetary Union? I explore a model where firms choose between fixed wage contracts (where the employer cannot lay off the worker, and the wage can only be changed by mutual consent), or contracts where employment is at will, so that either party may terminate employment (with strong similarities to temporary jobs). A fixed wage contract provides better incentives for investment and training, while employment at will facilitates efficient mobility. Inflation erodes the real value of a fixed contract wage over time, and badly matched workers are more likely to quit for other jobs. Disinflation has opposing effects on labour market rigidity: fixed wage contracts become more rigid in real terms, but fewer firms will choose fixed wage contracts. Previous versions of the paper have circulated under the title "Labour market rigidities and inflation". I have benefitted from comments by Karl Ove Moene, Asbjørn Rødseth, Lucy White, and participants at presentations at the University of Oslo, CODE University of Barcelona, and the Norwegian School of Management, and from a discussion with Larry Katz. I am grateful for the hospitality of NBER, where part of this paper was written.
This paper analyzes the relationship between the budget balance and the cyclical situation of the... more This paper analyzes the relationship between the budget balance and the cyclical situation of the economy. There are two main purposes. In the first analysis, we develop a method for economic policy, and induced changes that arise due to changes in the economy. The discretionary component of the change in the budget balance measure changes in fiscal stance and can be used as a fiscal policy indicator. As a measure of changes in fiscal policy, the proposed indicator has two advantages over existing indicators used by international organizations. First, the adjustment of changes in the economy is attached to important tax bases, rather than to the GDP, leading to higher accuracy when tax bases are not perfectly component does not include the effect on the budget balance of structural changes in the economy (as measured by potential output), that are not directly related to fiscal policy. The induced change component can be used to evaluate the cyclical sensitivity of public finances w...
RÉSUMÉ ............................................................................................. more RÉSUMÉ ............................................................................................................................ 2 THE UNEMPLOYMENT PROBLEM A NORWEGIAN PERSPECTIVE................................ .......... 5
This paper establishes a new fact about the compositional changes in the pool of unemployed over ... more This paper establishes a new fact about the compositional changes in the pool of unemployed over the U.S. business cycle and evaluates a number of theories that can potentially explain it. Using micro-data from the Current Population Survey for the years 1962-2011, it documents that in recessions the pool of unemployed shifts towards workers with high wages in their previous job. Moreover, it shows that these changes in the composition of the unemployed are mainly due to the higher cyclicality of separations for high-wage workers, and not driven by differences in the cyclicality of job-finding rates. A search-matching model with endogenous separations and worker heterogeneity in terms of ability has difficulty in explaining these patterns, but an extension of the model with creditconstraint shocks does much better in accounting for the new facts.
Most wage-contracting models with rational expectations fail to replicate the persistence in infl... more Most wage-contracting models with rational expectations fail to replicate the persistence in inflation observed in the data. We argue that coordination problems and multiple equilibria are the keys to explaining inflation persistence. We develop a wage-contracting model in which workers are concerned about being treated fairly. This model generates a continuum of equilibria (consistent with a range for the rate of unemployment), where workers want to match the wage set by other workers. If workers' expectations are based on the past behavior of wage growth, these beliefs will be self-fulfilling and thus rational. Based on quarterly U.S. data over the period 1955-2000, we find evidence that inflation is more persistent between unemployment rates of 4.7 and 6.5 percent, than outside these bounds, as predicted by our model.
We provide a new explanation for why firms pay for general training in a competitive labor market... more We provide a new explanation for why firms pay for general training in a competitive labor market. If firms are unable to tailor individual wages to ability, for informational or institutional reasons, they will pay for general training in order to attract better quality workers. The market provision of training may well exceed the first best level. Our explanation relies on wage compression within skill categories, while imperfect competition based explanations for firm subsidised general training rely on wage compression across skill categories. JEL Classification: J31, D82. V. Bhaskar Department of Economics University of Essex Wivenhoe Park Colchester CO4 3SQ United Kingdom [email protected] Steinar Holden Department of Economics University of Oslo Box 1095 Blindern 0317 Oslo Norway [email protected] Thanks to Alison Booth, Espen Moen and seminar participants at Essex for useful comments. V. Bhaskar thanks the Economic and Social Research Council, UK for its support und...
This paper explores the existence of downward real wage rigidity (DRWR) in 19 OECD countries, ove... more This paper explores the existence of downward real wage rigidity (DRWR) in 19 OECD countries, over the period 1973-1999, using data for hourly nominal earnings at industry level. Based on a nonparametric statistical method, which allows for country and year specific variation in both the median and the dispersion of industry wage changes, we find evidence of some downward rigidity of real wages in OECD countries overall, as well as for regions and time periods. There is some evidence that real wage cuts are less prevalent under strict employment protection legislation and high union density. Generally, we find stronger evidence for downward nominal than for downward real wage rigidity.
What is the economic role of credit rating agencies (CRAs), and how should they be paid? We study... more What is the economic role of credit rating agencies (CRAs), and how should they be paid? We study how credit rating agencies (CRAs) can serve as coordination device, and thereby prevent or cause ineffi cient liquidation of projects with a long horizon. We show that if CRAs can impact real outcomes, then their reputation concerns hamper truthful revelation of information, and, as a consequence, limit their ratings’informational content. We then show that equilibrium behavior is shaped by two prominent regimes: (i) an ‘optimistic’regime in which CRAs tend to give good ratings, and (ii) a ‘pessimistic’regime in which CRAs tend to give bad ratings. But both regimes are self-defeating: (i) only bad ratings do affect investors’ behavior in an optimistic regime while (ii) only good ratings affect investors’ behavior in a pessimistic regime. Existing evidence on the environment preceding the financial turmoil starting in 2007-2008 fits with our characterization of an optimistic regime. Henc...
This paper treats the oil market as an oligopoly with a competitive fringe. The oligopoly is assu... more This paper treats the oil market as an oligopoly with a competitive fringe. The oligopoly is assumed to consist of Egypt, Oman, Mexico, Malaysia and Norway plus all OPEC members. The remaining oil producing countries are included in a fringe which by assumption takes the oil price development as exogenously given. Outcomes with varying degrees of collusion within the oligopoly are specified. Intermediate cases are also studied, such as complete or partial cooperation within OPEC, but no cooperation between OPEC and any other countries in the oligopoly. The model is implemented in the PCbased MODLER software, and empirical results from the simulations on the different model versions are presented. Not to be quoted without permission from author(s). Comments welcome. THE OIL MARKET AS AN OLIGOPOLY Kjell Berger, Michael Hoel, Steinar Holden and . Øystein Olsen *
Inflation can “grease” the wheels of economic adjustment in the labor market by relieving the con... more Inflation can “grease” the wheels of economic adjustment in the labor market by relieving the constraint imposed by downward nominal wage rigidity, but not if there is also substantial downward real wage rigidity. At the same time, inflation can throw “sand” in the wheels of economic adjustment by degrading the value of price signals. A number of recent studies suggest that wage rigidity is much more important for business cycles and monetary policy than previously believed (see Erceg, Henderson and Levin, 2000, Smets and Wouters, 2003, and Hall, 2005). Thus, our results on how wage rigidity and other labor market imperfections vary between countries and how they are affected by the rate of inflation should be of considerable value in formulating monetary policy and conducting related research.
We provide a new explanation for why firms pay for general training in a competitive labor market... more We provide a new explanation for why firms pay for general training in a competitive labor market. If firms are unable to tailor individual wages to ability, for informational or institutional reasons, they will pay for general training in order to attract better quality workers. The market provision of training may well exceed the first best level. Our explanation relies on wage compression within skill categories, while imperfect competition based explanations for firm subsidised general training rely on wage compression across skill categories.
We study a search model with employment protection legislation. We show that if the output from t... more We study a search model with employment protection legislation. We show that if the output from the match is uncertain at the hiring stage, a discriminatory equilibrium may exist in which workers with the same productive characteristics are subject to different hiring standards. If a bad match takes place, discriminated workers will take longer to find another job, prolonging the costly period for the firm. This makes it less profitable for firms to hire discriminated workers, thus sustaining the discrimination. In contrast to Becker’s model, the existence of employers with a taste for discrimination may make it more profitable to discriminate, even for firms without discriminatory preferences.
We develop an equilibrium theory of credit rating in the presence of rollover risk. By in uencing... more We develop an equilibrium theory of credit rating in the presence of rollover risk. By in uencing rational creditors, ratings a ect sovereigns' probability of default, which in turn a ects ratings. In equilibrium, credit rating is pro-cyclical and magni es underlying market conditions. Moreover, biased incentives of credit rating agencies are ultimately self-defeating a bias toward issuers makes sovereign debt more risky.
In most European countries, money wages are given in collective agreements or individual employme... more In most European countries, money wages are given in collective agreements or individual employment contracts, and the employer cannot unilaterally cut wages, even after the expiration of a collective agreement. Ceteris paribus, workers have a stronger bargaining position when they try to prevent a cut in money wages. If inflation is so low that some money wages have to be cut, workers' stronger bargaining position requires higher unemployment in equilibrium. However, inflation is more stable when money wage rigidity binds, providing an incentive for monetary policy makers to choose a low target for inflation, which is easier to fulfil.
How will the commitment to price stability affect labour market rigidities in the European Moneta... more How will the commitment to price stability affect labour market rigidities in the European Monetary Union? I explore a model where firms choose between fixed wage contracts (where the employer cannot lay off the worker, and the wage can only be changed by mutual consent), or contracts where employment is at will, so that either party may terminate employment (with strong similarities to temporary jobs). A fixed wage contract provides better incentives for investment and training, while employment at will facilitates efficient mobility. Inflation erodes the real value of a fixed contract wage over time, and badly matched workers are more likely to quit for other jobs. Disinflation has opposing effects on labour market rigidity: fixed wage contracts become more rigid in real terms, but fewer firms will choose fixed wage contracts. Previous versions of the paper have circulated under the title "Labour market rigidities and inflation". I have benefitted from comments by Karl Ove Moene, Asbjørn Rødseth, Lucy White, and participants at presentations at the University of Oslo, CODE University of Barcelona, and the Norwegian School of Management, and from a discussion with Larry Katz. I am grateful for the hospitality of NBER, where part of this paper was written.
This paper analyzes the relationship between the budget balance and the cyclical situation of the... more This paper analyzes the relationship between the budget balance and the cyclical situation of the economy. There are two main purposes. In the first analysis, we develop a method for economic policy, and induced changes that arise due to changes in the economy. The discretionary component of the change in the budget balance measure changes in fiscal stance and can be used as a fiscal policy indicator. As a measure of changes in fiscal policy, the proposed indicator has two advantages over existing indicators used by international organizations. First, the adjustment of changes in the economy is attached to important tax bases, rather than to the GDP, leading to higher accuracy when tax bases are not perfectly component does not include the effect on the budget balance of structural changes in the economy (as measured by potential output), that are not directly related to fiscal policy. The induced change component can be used to evaluate the cyclical sensitivity of public finances w...
RÉSUMÉ ............................................................................................. more RÉSUMÉ ............................................................................................................................ 2 THE UNEMPLOYMENT PROBLEM A NORWEGIAN PERSPECTIVE................................ .......... 5
This paper establishes a new fact about the compositional changes in the pool of unemployed over ... more This paper establishes a new fact about the compositional changes in the pool of unemployed over the U.S. business cycle and evaluates a number of theories that can potentially explain it. Using micro-data from the Current Population Survey for the years 1962-2011, it documents that in recessions the pool of unemployed shifts towards workers with high wages in their previous job. Moreover, it shows that these changes in the composition of the unemployed are mainly due to the higher cyclicality of separations for high-wage workers, and not driven by differences in the cyclicality of job-finding rates. A search-matching model with endogenous separations and worker heterogeneity in terms of ability has difficulty in explaining these patterns, but an extension of the model with creditconstraint shocks does much better in accounting for the new facts.
Most wage-contracting models with rational expectations fail to replicate the persistence in infl... more Most wage-contracting models with rational expectations fail to replicate the persistence in inflation observed in the data. We argue that coordination problems and multiple equilibria are the keys to explaining inflation persistence. We develop a wage-contracting model in which workers are concerned about being treated fairly. This model generates a continuum of equilibria (consistent with a range for the rate of unemployment), where workers want to match the wage set by other workers. If workers' expectations are based on the past behavior of wage growth, these beliefs will be self-fulfilling and thus rational. Based on quarterly U.S. data over the period 1955-2000, we find evidence that inflation is more persistent between unemployment rates of 4.7 and 6.5 percent, than outside these bounds, as predicted by our model.
We provide a new explanation for why firms pay for general training in a competitive labor market... more We provide a new explanation for why firms pay for general training in a competitive labor market. If firms are unable to tailor individual wages to ability, for informational or institutional reasons, they will pay for general training in order to attract better quality workers. The market provision of training may well exceed the first best level. Our explanation relies on wage compression within skill categories, while imperfect competition based explanations for firm subsidised general training rely on wage compression across skill categories. JEL Classification: J31, D82. V. Bhaskar Department of Economics University of Essex Wivenhoe Park Colchester CO4 3SQ United Kingdom [email protected] Steinar Holden Department of Economics University of Oslo Box 1095 Blindern 0317 Oslo Norway [email protected] Thanks to Alison Booth, Espen Moen and seminar participants at Essex for useful comments. V. Bhaskar thanks the Economic and Social Research Council, UK for its support und...
This paper explores the existence of downward real wage rigidity (DRWR) in 19 OECD countries, ove... more This paper explores the existence of downward real wage rigidity (DRWR) in 19 OECD countries, over the period 1973-1999, using data for hourly nominal earnings at industry level. Based on a nonparametric statistical method, which allows for country and year specific variation in both the median and the dispersion of industry wage changes, we find evidence of some downward rigidity of real wages in OECD countries overall, as well as for regions and time periods. There is some evidence that real wage cuts are less prevalent under strict employment protection legislation and high union density. Generally, we find stronger evidence for downward nominal than for downward real wage rigidity.
What is the economic role of credit rating agencies (CRAs), and how should they be paid? We study... more What is the economic role of credit rating agencies (CRAs), and how should they be paid? We study how credit rating agencies (CRAs) can serve as coordination device, and thereby prevent or cause ineffi cient liquidation of projects with a long horizon. We show that if CRAs can impact real outcomes, then their reputation concerns hamper truthful revelation of information, and, as a consequence, limit their ratings’informational content. We then show that equilibrium behavior is shaped by two prominent regimes: (i) an ‘optimistic’regime in which CRAs tend to give good ratings, and (ii) a ‘pessimistic’regime in which CRAs tend to give bad ratings. But both regimes are self-defeating: (i) only bad ratings do affect investors’ behavior in an optimistic regime while (ii) only good ratings affect investors’ behavior in a pessimistic regime. Existing evidence on the environment preceding the financial turmoil starting in 2007-2008 fits with our characterization of an optimistic regime. Henc...
This paper treats the oil market as an oligopoly with a competitive fringe. The oligopoly is assu... more This paper treats the oil market as an oligopoly with a competitive fringe. The oligopoly is assumed to consist of Egypt, Oman, Mexico, Malaysia and Norway plus all OPEC members. The remaining oil producing countries are included in a fringe which by assumption takes the oil price development as exogenously given. Outcomes with varying degrees of collusion within the oligopoly are specified. Intermediate cases are also studied, such as complete or partial cooperation within OPEC, but no cooperation between OPEC and any other countries in the oligopoly. The model is implemented in the PCbased MODLER software, and empirical results from the simulations on the different model versions are presented. Not to be quoted without permission from author(s). Comments welcome. THE OIL MARKET AS AN OLIGOPOLY Kjell Berger, Michael Hoel, Steinar Holden and . Øystein Olsen *
Inflation can “grease” the wheels of economic adjustment in the labor market by relieving the con... more Inflation can “grease” the wheels of economic adjustment in the labor market by relieving the constraint imposed by downward nominal wage rigidity, but not if there is also substantial downward real wage rigidity. At the same time, inflation can throw “sand” in the wheels of economic adjustment by degrading the value of price signals. A number of recent studies suggest that wage rigidity is much more important for business cycles and monetary policy than previously believed (see Erceg, Henderson and Levin, 2000, Smets and Wouters, 2003, and Hall, 2005). Thus, our results on how wage rigidity and other labor market imperfections vary between countries and how they are affected by the rate of inflation should be of considerable value in formulating monetary policy and conducting related research.
We provide a new explanation for why firms pay for general training in a competitive labor market... more We provide a new explanation for why firms pay for general training in a competitive labor market. If firms are unable to tailor individual wages to ability, for informational or institutional reasons, they will pay for general training in order to attract better quality workers. The market provision of training may well exceed the first best level. Our explanation relies on wage compression within skill categories, while imperfect competition based explanations for firm subsidised general training rely on wage compression across skill categories.
We study a search model with employment protection legislation. We show that if the output from t... more We study a search model with employment protection legislation. We show that if the output from the match is uncertain at the hiring stage, a discriminatory equilibrium may exist in which workers with the same productive characteristics are subject to different hiring standards. If a bad match takes place, discriminated workers will take longer to find another job, prolonging the costly period for the firm. This makes it less profitable for firms to hire discriminated workers, thus sustaining the discrimination. In contrast to Becker’s model, the existence of employers with a taste for discrimination may make it more profitable to discriminate, even for firms without discriminatory preferences.
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