Increasing Labor Market Flexibility: Lower Adjustment Costs For Northern Workers

In practice, an increase in β could mean to provide incentives for unemployed workers to intensify job search, e.g. by reducing the level or duration of unemployment benefit payments. Alternatively, it could mean an increase in the efficiency of the placement service. Formally, an increase in β does not

affect the Northern steady-state curve (31), but it shifts the Southern steady-state curve (32) to the left as is shown in Figure 4 below.

insert here: Figure 4

The steady-state effects are exactly opposite to that of globalization (increase in L_S) and identical to that of stricter IPRP (decrease in η_I). In the case of a flexible Northern labor market (β > β ^crit) with relatively low firing costs (B < B^crit), starting from E₀, an increase in Northern labor market flexibility leads to a move of the steady-state equilibrium to E1 and thus to a decrease in the steady-state level of R&D difficulty x_N and a decrease in the Southern imitation rate C. To understand these results, first note that the immediate effect of an increase in β is a decrease in Northern unemployment, see (30), hence there is more labor available for both production and R&D (L_N rises). However, dividing both sides of (15) or (20) by L_N demonstrates that in both countries, ceteris paribus discounted R&D bene-fits decline relative to R&D costs: while R&D difficulty is proportional to LN, world demand for Northern or Southern products of average quality increases by less than one for one with L_N. The ex-planation for the leftward shift of the Southern steady-state curve is the same as given before when discussing the steady-state effects of an increase in the Northern R&D subsidy rate s_R. Hence, if the Northern labor market is relatively flexible (i.e., β > β ^crit), a further increase in β reduces Southern imitation incentives, while the opposite holds true if the Northern labor market is relatively inflexible (β < β ^crit). However, the general equilibrium effect on C can only be positive if the Northern steady-state curve is negatively sloped as in panel (d) of Figure 4.

To sum up, all effects stated in Proposition 1 and Table 1 are simply reversed for an increase in β – just as stricter IPRP, a more flexible Northern labor market also serves as a mitigation device for the effects of the type of globalization we studied here. Ceteris paribus, it improves the welfare of the rep-resentative Northern consumer by alleviating the negative employment effects of globalization for B <

B^crit. At the same time, however, it unambiguously thwarts the positive quality-growth effect and the positive purchasing power effect of globalization.

6 Conclusions

This paper emphasizes that the Southern ‘globalization threat’ for the labor markets in advanced in-dustrialized countries is determined in general equilibrium and is thus endogenous. In the case of our model, the degree of Northern labor market frictions (firing costs, job-finding rate) determines both the size of the Southern imitation rate and the sign of the globalization effects on employment, growth and wage rates. Inter alia, our results contradict the popular view that consumers in Northern countries with flexible labor markets will necessarily benefit most from the current wave of globalization, as measured by the entry of large developing countries like China and India into the world free-trade markets. For example, we have shown that only consumers in Northern countries with substantial la-bor market adjustment costs for both firms and workers enjoy a ‘double dividend’ from globalization:

a permanent reduction in unemployment and a temporary increase in the quality-growth rate of con-sumer goods.²⁴ An increase in the job-finding rate (e.g., by decreasing the level or the duration of un-employment benefit payments) mitigates the globalization effects in the same way as stricter IPRP in the South. The negative employment effect of globalization that results for sufficiently low firing costs in the North can be alleviated either by increasing R&D subsidies or by further reducing firing costs. If the job-finding rate is sufficiently low, however, this policy would necessarily come at the cost of a temporary quality-growth slowdown.

Further research could try to endogenize Northern labor market institutions within this type of dynamic North-South non-scale growth models by adding a political-economy dimension. This could be fruitful since it appears to be an empirical regularity that employment protection and openness are positively correlated. For example, using the job protection index of Blanchard and Wolfers (2000) and the measure of openness from Penn World Tables, Mark 5.6, Agell (2002) shows that within a sample of 20 OECD countries between the early 1960s and the late 1970s, “[...] job protection in-creased the most in those countries that got the most open” (ibid, p. 129).²⁵ As argued in this paper, the level of job protection (as captured by the firing costs) in open Northern economies is highly relevant for the qualitative effects of globalization shocks coming from the South.

7 Appendices

Appendix A: Derivation Of The Individual’s Consumption Demand Function (4)

Defining a new state variable Φ with Φ(0)=0, Φ(1)=c(t) and dΦ(ω)/dω = p(ω, t)⋅d(ω, t), the

24 We are anxious to point out that our results do not imply the recommendation that Northern labor markets should be made inflexible enough such that Northern consumers are able to enjoy this double dividend from globalization. For example, a decrease in β would unambiguously raise the steady-state unemployment rate in two out of four cases summarized in Table 1, and an increase in firing costs can also have harmful employ-ment or growth effects, as can be inferred from Table 2. The basic message is rather that there is no obvious reason to believe that consumers in Northern countries with particular inflexible labor markets should fear the globalization ‘threat’ more than others. Instead, globalization can help to mitigate their employment and growth problems.

25 A theoretical reasoning for why the voters’ demand for employment protection increases along with exoge-nous shocks that ceteris paribus tend to raise the steady-state innovation and growth rate is provided in the non-scale endogenous growth model of Grieben (2005). Globalization (as defined in this paper) could be one such shock, although it is not explicitly analyzed in that closed-economy model.

Inserting (A.2) into the budget constraint from (3) yields

Inserting (4) into (2) and using the fact the households only consume goods with the lowest quality-adjusted price gives individual instantaneous utility in the North as

( ) ( ) ^{( )} ( )

where we have used monopoly markup prices pN,S = [σ/(σ − 1)]⋅wN,S, the definition of average quality level Qt ≡

∫

₀¹λ^{j( )ω} dω ≡

∫

¹₀q

( )

ω ωd ^, _{∫ 0} ^1q

( ) ( )

^{ω ⋅p ω 1−σ dω = p}_N^{1−σ ⋅Q}_N ^+p_S^{1−σ ⋅Q}_S and (22). Us-ing the facts that w_S is a constant fraction of w_N (see (36)) and that I and C are constant in a steady-state equilibrium, logarithmic differentiation of the last line of (B.1) gives

1

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Figures

C

x_N (31)

(32)

C

x_N (32)

(31)

panel (a): < B B^crit and β > β^crit panel (b): > B B^{c rit} and β > β^crit C

x_N (31) (32)

panel (c): < B B^crit and β < β^crit

C

x_N (31)

(32)

panel (d): > B B^{c rit} and β < β^crit

E₀ E₀

E₀ E₀

β^crit= β

β < β^crit β > β^crit

β^crit= β

β < β^crit β > β^crit

Figure 1: Steady-State Equilibrium

C

x_N (31)

(32)

C

x_N (32)

(31)

panel (a): < B B^crit and β > β^crit panel (b): > B B^{c rit} and β > β^crit C

x_N (31) (32)

panel (c): < B B^crit and β < β^crit

C

x_N (31) (32)

panel (d): > B B^{c rit} and β < β^crit LS

E₀

E₁

E₀

E₀ E₀

E₁

E₁

E₁

LS

LS

LS

Figure 2: Steady-state effects of globalization

C

x_N (31)

(32)

C

x_N (32)

(31)

panel (a): < B B^crit and β > β^crit panel (b): > B B^crit and β > β^crit C

x_N (31) (32)

panel (c): < B B^crit and β < β^crit

C

x_N (31)

(32)

panel (d): > B B^crit and β < β^crit E₀

E₁

E₀

E₀

E₀ E₁

E₁

E₁ s_R

s_R

s_R s_R

s_R

s_R s_R

s_R

Figure 3: Steady-state effects of rising R&D subsidies in the North

C

x_N (31)

C

x_N

(31)

panel (a): < B B^crit and β > β^crit panel (b): > B B^crit and β > β^crit C

x_N (31)

panel (c): < B B^crit and β < β^crit

C

x_N

(31)

panel (d): > B B^crit and β < β^crit E₀

E₁

E₀

E₀

E₀ E₁

E₁

E₁

(32) β

β (32)

β

β (32)

(32)

Figure 4: Steady-state effects of increasing Northern labor market flexibility

Im Dokument Globalization with labor market frictions and non-scale growth (Seite 30-39)