New Economist

Do immigrants reduce wages?

The surge in US immigration in recent decades has seen debate about the economic effects of immigrants on US natives, particularly on their wages, gain momentum. Tomorrow sees a noteworthy paper on the topic delivered at the NBER's International Trade and Investment Workshop. - part of week 4 of the NBER Summer Institute.

Università di Bologna's Gianmarco Ottaviano and Giovanni Peri from UC Davis have a topical new paper entitled Rethinking the Effects of Immigration on Wages (PDF). Unlike some of the other recent studies, they find a positive effect on wages of US-born workers. Here is the abstract:

This paper revisits the following important question: what is the effect of immigration on average and individual wages of U.S.-born workers? In particular we analyze the impact of surging immigration, on average real wages and on the increased wage dispersion during the period 1990-2004. Building on Borjas (2003) we emphasize the need for a general equilibrium approach to analyze this problem.

The impact of immigrants on wages of US born workers can be evaluated only by accounting carefully for labor market and capital market interactions in production. This requires to assume a production function, a mechanisms of physical capital accumulation and to derive labor demands for different types of workers (by education and experience). The usual ”reduced form” approach estimates the effect of immigrants on wages of US-born workers within the same skill group. Such method only provides estimates of a partial effect, usually negative and uninformative of the total effect of immigration on wages.

Using our general equilibrium approach we estimate that physical capital adjust promptly and fully to immigration (already within one year) and that immigrants are imperfect substitutes for US-born workers within the same education and experience group (because they choose different occupations and have different skills).

These two facts, overlooked by the previous literature, imply a positive and significant efect of immigration on the average wage of U.S.-born workers, already in the short run. They also imply a small negative effect of immigration on wages of uneducated US born workers and a positive wage effect on all other US-born workers. Hence only a very small fraction of the increase in College/High School Dropout wage gap during the 1990-2004 period can be attributed to immigration.

India outsources itself

Ah the irony. Half a million Indian bank workers went on strike today - at proposals to outsource some of their jobs. The FT's Amy Yee in New Delhi has the story: India bank workers walk off their jobs

Nearly 500,000 bank workers in India, home to one of the world’s most robust outsourcing industries, walked off their jobs on Friday to protest against the planned outsourcing of their work to private domestic companies.

The one-day strike was in response to “continuing attacks on the banking industry and bank employees’ jobs and job security,” said the All India Bank Officer’s Association (AIBOA), one of the three labour unions organising the protest. Outsourcing in India’s banking industry would threaten 250,000 jobs, the unions said.

The rally is ironic given that India’s software and business process outsourcing industry is one of the country’s biggest engines of growth. Companies such as Infosys, Tata Consultancy Services and Wipro together generate billions of dollars annually from multinational companies shifting work overseas to cut costs.

But bank labour unions say their outcry is different from that of workers in rich countries who have lost jobs to India. “We are an impoverished nation,” said RJ Sridharan, general secretary of AIBOA. “India is a labour-oriented country so we need more jobs that are secure. Developed countries have fewer hands to work.”

The Reserve Bank of India has proposed letting banks use outside agencies in India for tasks such as processing loan and credit card applications, supervision of loans and data processing.

“The world over, banks are increasingly using outsourcing as a means of both reducing cost and accessing specialist expertise,” the RBI said in a circular that contained guidelines on outsourcing financial services.

Mr Sridharan said that outsourcing “does not lead to more efficiency. It creates complications in rendering good customer service.” He claimed that India’s banks are trying to outsource jobs with a view to offset low-cost lending to corporate sectors.

Who's afraid of labour market flexibility?

In a provocative new report, the Work Foundation argues that Lack of regulation may not be the key to success:

The idea that low levels of employment regulation and weak trade unions are the resaon for Britain's good record at creating jobs and keeping unemployment down is a myth, controversial new research has suggested. The study ..has also questioned the widespread assumption within British corporate and political circle that "being more like America" is essential if high levels of unemployment in some continental European countries, including Britain, are to be reduced.

The research ..argued that several European countries (Denmark, Sweden, Austria and the Netherlands) have achieved comparable or better levels of labour market dynamism to the UK, while at the same time allowing for much greater levels of "workplace justice". These nations have demonstrated that the combination of moderately tight labour law, strong trade unions and collective bargaining, and relatively generous levels of unemployment benefits (combined with tight conditions, job search obligations and active labour market programmes), are compatible with strong employment performance. Therefore, the foundation has said, it is wrong to believe, contrary to the orthodoxy of the past two decades, that the most lightly regulated countries are the most successful.

David Coats ..the author of the report, said: "The standard view of flexibility is shot through with myths, half-truths and downright manipulation of the evidence. "In the UK and US, the idea that deregulation equals high employment has been allowed free reign despite the overwhelming evidence that countries with very different laws and institutions have performed just as well economically, have less wage inequality and a higher quality of working life for their citizens," he added. "Although it remains true that countries such as France and Germany suffer from high levels of unemployment, others – notably Denmark, Sweden, the Netherlands and Austria – do not," he continued.

The report, Who's Afraid of Labour Market Flexibility, is available online. Given David Coats' TUC background, it should be no surprise that the report advocates reforms aimed at improving the level of "workplace justice" offered in Britain:

These would enhance the quality of working life without damaging job creation or unemployment levels, it argued. The reforms include: a higher level of compensation for redundancy, reducing the qualifying period for a redundancy payment and a review of the penalties and sanctions imposed on employers who fail to properly inform and consult about threats to employment and redundancies.

Nice sentiments - but while making it more expensive to sack people could improve the job security of those in work, it may also discourage employers from hiring in the first place. Not damaging job creation? Don't bet on it.

Germany's changing wage bargaining system

Another post on Germany. A recent piece by BNP Paribas economists asks Is there a radical change in the wage-fixing system? (PDF). It notes the trend decline in unionisation, and concludes that:

Germany’s wage-fixing system is evolving towards more decentralised bargaining arrangements.

..It is hard to say whether the decentralisation of pay bargaining will benefit employment. Empirical and theoretical studies on the subject have produced contradictory findings. ...Greater decentralisation in pay bargaining in Germany will probably mean widening wage differentials.

...The decentralisation of pay bargaining is well under way in Germany. It will introduce greater wage flexibility and will favour employment, particularly among the least qualified segments of the labour force.

IMF: French labour reforms could raise the unemployment rate

In a recent post I discussed recent research on the importance of comprehensive versus partial structural reforms. A new IMF working paper on French labour market reform backs this view. Modelling the likely impact of the type of partial labour reform recently proposed - which sought to reduce employment protection only for younger workers on temporray contracts - Jian-Ping Zhou finds this could actually raise the unemployment rate. Here is the abstract for Reforming Employment Protection Legislation in France:

Over the last 15 years, the reforms of employment protection legislation (EPL) in European countries have mainly eased hiring and firing restrictions for temporary employment while leaving the strict EPL provisions for regular or permanent contracts unchanged. Recent reforms in France follow this pattern. Using a search-matching model, we argue that this type of partial reform is inefficient: easing restrictions on temporary jobs fosters both job creation and job destruction, but strict EPL discourages both.

The overall impact on equilibrium unemployment is thus ambiguous, depending on the characteristics of the specific labor market. Simulations of the model, calibrated for the French labor market, suggest that the job destruction effect is stronger, thus raising the unemployment rate.

What this shows, once again, is the importance of putting in place broad and well sequenced structural reforms. Ad hoc and partial 'reforms' may well prove ill conceived and - even if introduced - fail to deliver on their promises.

The economics of Prozac

A new paper by Etienne Wasmer at Université du Québec à Montréal, The Economics of Prozac, asks: 'Do employees really gain from strong employment protection?' Wasmer uses a Canadian national health survey to show that during downturns, firms covered by stricter employment protection legislation (EPL) may monitor and harass workers in order to induce a quit. This raises worker stress levels, and is also associated (albeit more weakly) with depression and the consumption of various psychotropic drug.

Unlike many other contracts, employment contracts are subject to various external administrative procedures governing separations, ranging from compulsory severance payments and advance notice periods (usually seniority based), to collective layoff procedures (usually depending on the firm’s size), and other forms of protections against arbitrary dismissal.These external constraints may raise the wellbeing of workers if everything remains constant, but may fail to do so once other economic channels are accounted for.

Here, we explore the effect of such legislation on the firm’s attitude towards insiders (i.e.protected workers), notably worker monitoring, working environment, and ultimately what we could term harassment. We show that during downturns, harassing workers in order to induce a quit is a substitute for greater dismissal freedom, and that intense monitoring and depreciated working conditions will occur. Thus, a more protected workforce may lose morethan it gains from non-pecuniary pressures exerted by the firm.

We test these mechanisms using data from a panel of Canadian individuals (the National Public Health Survey) including details on work-related stress and the consumption of various medications, including anti-depressants. By exploiting cross-province differences in employment protection legislation, we show strong positive links between individual employment protection and some dimensions of stress, and weaker but positive links between employment protection, depression and the consumption of various psychotropic drugs. Tenure and firmsize information from another dataset is then used to generate further variance in EPL by imputation, confirming the previous results.

Wasmer concludes that "all these effects seem to come from ..management, monitoring being affected by EPL, rather than from ..effect (lack of turnover and mobility and associated job-mismatch)." However the title of the paper is misleading - his main finding relates to stress, not psychotropic drugs. And he confesses in the final paragraph that a "new representative survey of Canadian firms" (unnamed) that he has examined found "more satisfactory" labour relations in high EPL regions. He leaves the paper hanging on this final sentence:

This suggests that stress at work is primarily the result of flexibility in working time and not necessarily due to the quality of labor relationships.

An interesting speculation, to be sure, but one which casts serious doubts over his central assumption that employers in high EPL regions 'harass' workers during downturns. If bosses were being bastards one would not expect to see better labour relations!

A plausible alternative is that firms in high EPL regions seek to overcome these hiring and firing rigidities imposed on them through more flexible, team-based working and by eliciting greater employee loyalty and commitment - presumably though so-called 'new HRM' or 'high performance' approaches. This gives firms greater flexibility in their work organisation, but it can also add to employee stress.

More for the low paid

The low paid are set for substantial pay rises in Britain this October. The Low Pay Commission today published its 2006 report, and the UK government accepted their main recommedations. The DTI press release states:

About 1.3 million workers will be guaranteed higher pay when the minimum wage rises in October. The adult rate of the minimum wage will rise from £5.05 to £5.35 an hour and the youth rate for workers aged 18 to 21 will be increased from £4.25 to £4.45. The Government has also accepted the recommendation of the Low Pay Commission that the rate for workers aged 16-17 years should increase from £3.00 to £3.30.

This is not too much of a surprise; the adult and youth rate increase were outlined a year ago. However the 10% boost to 16-17 year old rates was unexpected (though they got no increase last year). Outgoing LPC chairman Adair Turner writes in his introduction to the report:

Since its introduction in 1999 the minimum wage has been a major success. It has significantly improved the wages of many low earners; it has helped improve the earnings of many low-income families; and it has played a major role in narrowing the gender pay gap. But it has achieved this without significant adverse effects on business or employment creation.

That may well be so - though given the deteriorating state of the UK labour market, one wonders for how much longer claims of no "significant adverse effects" can be made? Perhaps with rising unemployment in mind, Lord Turner sought to dampen expectations for future increases:

We do, however, consider that the phase in which the Commission is committed to increases in the minimum wage above average earnings is complete and, looking forward, the Commission will start with no presumption that further increases above average earnings are required.

Over the four years 2002 to 2006, the adult minimum wage will have increased by 27.4 per cent while (on latest forecasts) average earnings will have increased by 17 per cent. This has been an appropriate upward adjustment from the cautious level at which the minimum wage was originally set, but the Commission has always recognised that the minimum wage cannot increase faster than average earnings indefinitely.

A 27% increase in just four years is a pretty hefty increase. Time to settle for something a little more in line with average earnings growth, it would seem.

UPDATE: The Financial Times has also picked up on Turner's warnings; Increases in minimum wage set to slow:

Business leaders have welcomed strong signals from the Low Pay Commission that future increases in minimum pay rates would be more closely aligned to rises in general wages

...Alan Johnson, trade and industry secretary, said :“The kind of health warning that the Low Pay Commission has given is the right approach. The one thing that would damage the national minimum wage would be if it did damage to jobs.”

...Sir Digby Jones, director general of the CBI business organisation, said the latest minimum wage increase followed a 12 per cent rise between 2003 and 2005. This was “a rate of increase far in excess of average earnings growth” and was the last thing employers needed he claimed. There would be relief at the commission’s conclusion that the minimum wage had now reached an adequate level and that “future increases above and beyond average earnings are no longer necessary,” said Sir Digby.

Union decline in 24 countries

Out of 24 countries, the latest union density rates are lower than in 1970 in all but four small European economies (Finland, Sweden, Denmark, and Belgium). "These four happen to be the only ones in which unions are involved in the administration and execution of unemployment insurance". So writes Jelle Visser of the Amsterdam Institute for Advanced Labour Studies (AIAS) in the January 2006 Monthly Labor Review. His piece, Union membership statistics in 24 countries, provides an analysis of "adjusted" union membership time series data in 24 countries, and explanatory factors for the differences and trends in unionization. Three other findings are noteworthy.

First, the decline of union density among the young is "a rather universal research finding". Second, union decline has been particularly marked in the private sector:

The decline in unionization is concentrated very strongly in the market or private sector of the economy, with rates of unionization in the public or government sector remaining very high
in most countries.

Third, there has been a "rapid advance" of female union membership relative to that of men:

One striking finding is that in a number of countries the female unionization rate is equal with (Canada, the United Kingdom, Ireland) or even higher (Sweden, Norway, Finland) than the male unionization rate.

Visser also compiles union data for the ILO and the annual OECD Employment Outlook, and has published widely on the topic. My main concern with this report is that, even though adjusted, some of the national estimates are still suspect - particularly those based on administrative sources. For alternative membership estimates for many of these countries, based on standardised European Social Survey questions, see Determinants of Union Membership in 18 EU Countries: Evidence from Micro Data, 2002/03 by Claus Schnabel and Joachim Wagner.

Goodbye to the 'British disease'

Wednesday's monthly UK labour market release showed further weakening, with employment down and the number of unemployed and economically inactive both up. So far, so bad. But most newspapers chose to ignore some strikingly good news in the release. As the ONS summary (PDF) put it:

There were 15,000 working days lost during December 2005. In the twelve months to December 2005, there were 156,000 working days lost, the lowest calendar year total since comparable records began in 1891.

Yes, 1891. Moreover, the number of stoppages in 2005 (just 112) was also the lowest since records began in 1930 according to the online data series. Only Graham Searjeant, Financial Editor of The Times, appears to have noticed these remarkable numbers, in his Friday piece Britain has bloomed by striking out its winters of industrial discontent. He reminds us just how bad things used to be in Britain:

...Whatever else may be wrong with the economy, that is a cause for celebration. Every strike or lockout represents a failure. And the ordinary families who lose their pay usually suffer most.

The 156,000 days lost last year compare with about 30 million in 1979, when public sector unions killed off the Callaghan Government with their winter of discontent over pay. The last year of widespread industrial chaos came in 1984, when 27 million days were lost — coalminers were manoeuvred into a prolonged, bitter strike against closures of uneconomic pits, which precipitated the industry’s virtual demise.

During the 1970s disputes typically cost between six million and ten million working days a year. Those disputes were, however, only the culmination of industrial warfare that made the UK the sick economy of Europe.

...Days lost make up only a small part of the economic damage that industrial disputes caused. Labour relations took a high proportion of management time and mental effort that needed to be spent making businesses competitive, investing for the future, developing new products and exploring new markets.

Change was likely to be resisted by powerful unions, adding to the cost of investment and cutting returns. Bloated stocks of materials, parts and finished goods had to be kept to allow for supply disruptions; that in turn absorbed capital that could otherwise have been invested. Most managers preferred the quiet life or were simply not up to it.

He lists four reasons why industrial disputes have declined so much since then: Thatcher's atacks on union power, the decline of manufacturing, greater competition and the taming of inflation.

The new old age

As the pool of young recruits dries up, companies and countries are putting the retired back to work, writes Newsweek's Stefan Theil in The New Old Age. Once again, there are lessons from Finland:

..half of working-age Americans now expect to work into their 70s, whether by financial necessity or by lifestyle choice. In Japan, 78 percent of baby boomers between the ages of 55 and 59 say they plan to work beyond the official retirement age of 60.

These trends are forcing rich nations to rethink the long-held assumption that early retirement is a competitive advantage. Older workers were (and often still are) seen as less productive and more expensive, and thus ripe targets for corporations seeking to pare costs. OECD labor-market economist Mark Keese says governments from Germany to Ireland have long subsidized early retirement in order to free up jobs for the young, by offering generous benefits at very early retirement ages. Or they've doled out "disability" pensions to millions of still-young workers, often because of political pressure to get them off the unemployment rolls.

As a result, the average retirement age in rich nations has been falling steadily from as high as 69 in 1950 to 61 or lower in many OECD nations today. In an extreme case like France, with an average life span of 83 years, the average worker retires at 59 and lives off a state pension for more than two decades—a situation Keese calls "obviously not sustainable." All across the Western world, says Keese, current retirement policies are "relics of a bygone age."

There is another way. Finland was facing a similar situation when recession hit in the early 1990s; at the time, only 20 percent of Finns between the ages of 60 and 64 were working. Since then Finland has introduced "bonus pensions" for people working until 68, giving them a financial incentive to continue working—and paying taxes. Employers are also now required to have occupational health and safety programs in place to monitor and prevent work injuries such as repetitive stress disorder or muscle pains produced by desktop jobs, with the ultimate goal of extending the average working life by two to three years. Already, the employment rate among those 60 to 64 has doubled. The result: lower pension costs, higher tax revenues and, Finland says, faster economic growth.

The Finnish case now stands as a potential object lesson for nations where government policy still pushes older citizens out of the work force. In part because companies in France and Germany are so used to phasing out older employees, fewer than 5 percent of workers older than 50 participate in training programs, compared with 33 percent in Sweden and 21 percent in Finland, according to a landmark study of retirement practices published in October by the OECD.

In many countries, well-meaning laws designed to protect older workers—such as special prohibitions on firing, or age-based mandatory severance payments—have had the opposite effect, making companies reluctant to hire them in the first place. That's one reason that in Italy, two in five employment ads state bluntly that anyone 45 or older need not apply.

Such baldfaced discrimination against older workers is, however, on the way out at many companies. ...The big picture seems to be brightening for older people who want to work. The OECD reports that employment rates for workers 55 to 64 have risen from 46 percent in 1994 to 51 percent in 2004.