"Pay Growth, Fairness and Job Satisfaction: Implications for Nominal and Real Wage Rigidity", CAGE Working Paper 130 (June 2013). Additional Online Appendix. Abstract:Theories of wage rigidity often rely on a positive relationship between pay changesand utility, arising from concern for fairness or gift exchange. Supportive evidence has emerged from laboratory experiments, but the link has not yet been established with field data. This paper contributes a first step, using representative British data. Workers care about the level and the growth of earnings. Below-median wage increases lead to an insult effect except when similar workers have real wage reductions or firm production is falling. Nominal pay cuts appear insulting even when the firm is doing badly.
Download data and STATA do files for Pay Growth, Fairness and Job Satisfaction at https://sites.google.com/site/jcsmithecon/home (including Bai-Perron (1998)/Andrews (1993) tests for unknown breaks, POLS (van Praag and Ferrer-i-Carbonnel 2008), BHPS employment histories, and more).
"Unemployment and Mismatch in the UK" [Powerpoint], Bank of England/Institute of Macroeconomics Conference on "Unemployment, productivity and potential output: the aftermath of the crisis" (October 2012). Abstract: This paper combines dynamic decompositions of unemployment movements with measures of labour market mismatch to estimate the impact of mismatch on UK unemployment. Mismatch is calculated to have been responsible for around half the UK unemployment rise during the financial crisis. Although mismatch appears to have returned to normal levels, its impact on the UK unemployment rate persists. The actual unemployment rate's response to an increase in mismatch is initially muted compared to the adjustment of the steady state rate, but mismatch has a greater adverse effect on actual unemployment dynamics as the job finding rate returns to normal after the temporary mismatch shock. A path of mismatch working through negative co-movement of the job loss rate with the job finding rate is found to be empirically significant.
Previous version: Keynote Speech "UK Unemployment Dynamics During the Financial Crisis: Unemployment and Mismatch in the UK", Bank of England Chief Economists' Workshop (May 2012).
The Role of Worker Flows in the Dynamics and Distribution of Unemployment (with Michael W L Elsby and Jonathan Wadsworth), Oxford Review of Economic Policy, Vol.27, pp.338-363. June 2011 version available as IZA Discussion Paper 5784. April 2011 version available as Warwick Economics Research Paper number 962. Abstract: Unemployment varies substantially over time and across subgroups of the labour market. Worker flows among labour market states act as key determinants of this variation. We examine how the structure of unemployment across groups and its cyclical movements across time are shaped by changes in labour market flows. Using novel estimates of flow transition rates for the UK over the last 35 years, we decompose unemployment variation into parts accounted for by changes in rates of job loss, job finding and flows via non-participation. Close to two-thirds of the volatility of unemployment in the UK over this period can be traced to rises in rates of job loss that accompany recessions. The share of this inflow contribution has been broadly the same in each of the past three recessions. Decreased job finding rates account for around one quarter of nemployment cyclicality and the remaining variation can be attributed to flows via non-participation. Digging deeper into the structure of unemployment by gender, age and education, the flow-approach is shown to provide a richer understanding of the unemployment experiences across population subgroups.
The Ins and Outs of UK Unemployment (April 2011 version). Published in the The Economic Journal, vol.121, issue.552, pp.402-444. August 2010 version available as Warwick Economics Research Paper number 944. Abstract: This study shows that in the UK, increases in unemployment in a recession are driven by rises in the separation rate. A new decomposition of unemployment dynamics is devised that does not require unemployment to be in steady state at all times. This is important because low UK transition rates – one quarter the size of the US – imply substantial deviation of unemployment from steady state near cyclical turning points. In periods of moderation, the job finding rate is shown to have most influence on UK unemployment dynamics. Evidence comes from the first study of monthly data derived from individuals' labour market spells recorded in the British Household Panel Survey from 1988 to 2008.
"Recession and prospects for recovery, comparing UK and US"
(Powerpoint or PDF of slides): Presentation to Bank of England, 25 March 2011 and Keele University, 16 March 2011 (based on an update of Elsby and Smith, 2010).
(Powerpoint or PDF of slides): Presentation to ONS Labour Market Satistics Conference, BIS Conference Centre, London, 2 March 2011 (based on an update of Elsby and Smith, 2010).
The Great Recession in the UK Labour Market: A Transatlantic Perspective (September 2010 version) (with Michael W L Elsby). Published in the National Institute Economic Review, No.214, R26-R37 (October 2010). September 2010 version available as Warwick Economics Research Paper number 945. Abstract: The increase in unemployment in the United Kingdom that accompanied the Great Recession has been conspicuous by its moderation. The rise in joblessness is dwarfed by the recent experience of the United States, by past recessionary episodes in the UK and by the contraction in GDP in the UK. Increased rates of job loss have played a dominant role in shaping the rise in British unemployment, while increased unemployment duration has exhibited a milder response, especially in comparison to the US. Looking forward, the UK labour market appears to have adjusted fully to the shocks that prompted the recession. Signs of reductions in match efficiency witnessed recently in the U.S. are not mirrored in the UK. In contrast, while long-term unemployment currently remains well below historical levels, recent estimates of job finding rates suggest that it has the potential to rise much further. Thus, a timely recovery in aggregate demand will play an important role in averting persistently high unemployment in the future.
"Punishment without crime? Prison as a worker-discipline device", CEPR Discussion Paper 6621 (December 2007 version) (with Marcus Miller). Presented to RES Conference 2008. VoxEU January 2008: "Stalin's No-Shirking Condition" Abstract:An ‘efficiency wage’ model developed for Western economies is reinterpreted for Soviet Russia assuming that it was the Gulag not unemployment that acted as a ‘worker-discipline device’. Archival data now available allows for a basic account of the dynamics of the Gulag to be estimated. When this is combined with a dictatorship wishing to maximise the ‘investible surplus’ subject to an efficiency wage incentive constraint, what does it imply? That to secure resources for investment or war, consumption must be compressed; and making the Gulag harsher helps reduce incentive problems in the workplace. This is the cruel logic of coercion. But this economic rationale for the Gulag does not, we find, encompass randomised mass terror. Why did Stalin’s system of coercion ultimately fail? The paper concludes with comparisons of Western and Soviet systems from an efficiency wage perspective
"Differences in decline: quantile regression analysis of union wage differentials in the United Kingdom, 1991-2003" (April 2009 version) (with Wiji Arulampalam and Alejandra Manquilef). IZA Discussion Paper 4138. Revise and resubmit, British Journal of Industrial Relations. Abstract: Wage premia related to union membership and coverage are examined over 1991-2003, a period involving first decline, then stabilization, of unionization. Differences in union premia across workers and over time are studied using individual-level British Household Panel Survey data and quantile regression techniques allowing for endogeneity of the membership decision. Raw differentials suggest the presence of large positive membership and coverage premia that are stronger at the bottom of the wage distribution in both private and public sectors. After controlling for other factors influencing wages, union asymmetries are no longer apparent in the private sector. When endogeneity of union membership is taken into account, the private sector union wage premium disappears, indicating that individuals positively select into unions. In contrast, the public sector total union wage premium remains significant – entirely due to a coverage effect; it is stronger at the bottom among males, while for females the premium is constant across workers and substantial over the whole period, reflecting the continuing strength of public sector unions. Once we control for endogeneity, the membership premium is nowhere significant; there is no free rider puzzle in the private sector, as there is no coverage premium, but the puzzle persists for the public sector.