An essay on labor market frictions, international trade, and uncertainty Economics and Finance.
The labor market is a central institution in any modern economy. If the market does not function satisfactorily, willing workers will remain unemployed for too long, and many workers will occupy positions that are unsuited for them. Moreover, firms will not appear, grow, or close at the optimal rate. At the same time, the labor market is characterized by pervasive regulation. Across nations, the labor market is subject to minimum wages, hiring and bring restrictions, compulsory collective bargaining and arbitrage, limitations on the number of hours, anti discrimination clauses, curtailments on work by age and by gender, etc. Moreover, substantial differences in labor market flexibility persist even within groups of countries with similar income levels.
The purpose of this paper is to studying the role of labor market frictions and its interaction with international trade and uncertainty, the relationship between uncertainty and the business cycle.
When uncertainty increases, the value of a job match declines as the option value of waiting increases. Unemployment goes up, making it harder for unemployed workers to find jobs. The decline in employment drives the marginal product of capital downward, which triggers fall in capital investment. Uncertainty also makes economic agents cautious about decisions like employment, which adjustment costs can make expensive to reverse. Thus, it gives rise to a contractionary real option-value effect. In this, real options apply to key decisions: hirings, firing and firrm entry.
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As productivity can quickly revert, firms become more reluctant to separate from their workforce, all the more so as they pay firing costs. The decline in total employment drives the marginal product of capital downwards, which triggers a fall in capital investment. Firm dynamics have an impact on job creation and separation decisions, and vice versa. We find that increased uncertainty generates real exchange rate depreciation, current account surplus and reduces the stock offirms in the economy.
Over the past decades, trade liberalization has led to a significant trade expansion. In developing countries, job creation resulting from trade liberalization has mainly taken place in the informal economy. The novelty of this paper is to focus on the interactions between the choices to participate at the international trade and the induced labor reallocations between formal and informal activities.
However, trade expansion and higher levels of economic activity do not necessarily imply higher employment quality and better working conditions. The essay show that trade liberalization boosts economic activity and employment in both the formal and informal sector. In the emerging economy, in the medium run, trade liberalization ultimately induces more firms to export, thereby increasing labor demand and real wages. As in the developed economy, this leads to high share of exporters and informality in emerging economy.
In the long run, when the developed country has reached its long-run level of iceberg costs, in the emerging country trade expansion is still ongoing. In the emerging country, revenue growth is now driven by iceberg cost reduction which takes place only in the emerging country and still generates growth gains.
An easy way to promote formal employment is to reduce the payroll tax paid by firms. An alternative solution might be implementing a "budget-neutral" tax reform, consisting in increasing the consumption tax to fund the cut in payroll taxes. An advantage of this strategy is that the consumption tax has a larger base, it is easier to collect and more difficult to evade. The tax reform is country-specifc. The most important point is certainly the fact that the tax reform allows the welfare of the unemployed workers to increase, despite the large initial loses induced by the jump in the consumption tax.
This essay show that trade liberalization boosts economic activity in both developed and emerging countries. However, the paper find that trade liberalization is associated to higher informality, which ultimately implies less job security and lower employment quality. Policy makers should consider placing a high priority on promoting job quality and income equality. Policy interventions should follow a comprehensive approach that rests on three pillars: increasing the benefitts of formality, decreasing the costs of formalization and improving enforcement methods.
Tax policy interventions should go hand in hand with more effective social protection systems and labor laws. Extending unemployment benefits to all workers in the formal sector including those working part-time and/or on temporary contracts, could prevent unemployed from looking for an informal job. Another step to enhance the quality of existing jobs is intensifying labor inspections in those sector where the incidence of informal work is higher.
The effects of uncertainty shocks can vary across countries, depending on their structuralcharacteristics, policy reactions, etc. This paper tries to focus on the role of LMIs in the transmission of uncertainty shocks. Under irreversibility and uncertainty, rms become more reluctant to lay workers off. The role of other country characteristics is ambiguous.
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