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11 Is There a Trade-Off between Wages and Working Conditions? Stan Siebert University of Birmingham Paper prepared for e-Frame Conference on Measuring Well- Being and Fostering the Progress of Societies, 26-28 th June 2012, OECD Conference Centre, Paris
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Wages and working conditions Two important points: –First, wages should vary with working conditions, and, if they do, then wages alone are not a good guide to how well-off people are –Second, government policy constrains choice: policy attempts to improve working conditions, in particular, by preventing dismissals “employment protection legislation” (EPL) –Improvement in working conditions should be accompanied by a fall in wages – if not, employment falls, temporary employment rises etc 2
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Compensating wage differentials A competitive labour market is meant to establish compensating wage differentials (CWDs) with high wages for bad job conditions and low wages for good – opposite. Note, skill is kept constant: W low shows opportunities for low skill, and W high for high skill. Note how the cluster of observations for low skill will tend to have more “cash” (to pay the rent), and worse conditions – high skill can afford better conditions 33 Nice working conditions Nasty conditions -CWD +CWD Full wage W high skill W low skill High skill cluster of obs low skill cluster Important point: the low skilled are less well off than you think! Their high pay is partly because of worse conditions
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4 Evidence on CWDs 4 Evidence is that workers will forego sums of the order of 20-30% of the wage to secure good conditions. But EU countries heterogeneous – need to allow for government policy?
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Further evidence on CWDs 5 Note small CWD for job security in Finland - because wages cannot vary due to centralised collective agreements. Note Knabe et al (2010) show that the unemployed are not so unhappy being unemployed.
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Market determination of wages and conditions Simple theory – market establishes A or B according to which maximises employment As shown, A is the result, with low EPL (because costs to firms of higher EPL would outweigh value to workers If B is then imposed, wages must fall by the CWD – L falls a little If wages are sticky, L falls a lot 6 Labour Wages L0L0 L1L1 S LOW EPL S HIGH EPL D HIGH EPL D LOW EPL Cost of extra EPL to firms CWD=Value to workers A B C
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Problems with the simple theory Are there missing markets for job security, so both sides better off if it is mandated? The analysis is static – what about employment adjustment, innovation? What about the fact that EPL assists insiders, makes outsiders worse off, eg increases temporary employment? Still, it is a starting hypothesis – that EPL reduces employment, particularly when wages are sticky 77
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Employment effects of EPL 8 Fiori et al (2012) show that EPL reduces employment when FDI is restricted. Also Bassanini et al (2009) show TFP growth is reduced in industries which have a high layoff propensity and where TFP “bites”. Also Kahn (2007) shows that EPL causes temp employment – simple model broadly supported
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Conclusions CWDs: –There appear to be CWDs – good job conditions are not cheap –We need to investigate variations between countries – CWDs cannot easily be revealed where “floors” are set for wages and working conditions –We need to know more about the CWD for job security Policy: –EPL mandates will have adverse effects on outsiders if wages cannot fall 9
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