Alogoskoufis, G.S. and Smith, R. (1991), “On Error Correction Models: Specification, Interpretation, Estimation,” Journal of Economic Surveys, Vol. 5, No. 1.
Banque Nationale de Belgique (1992), “Estimation de la Reaction des Salaires aux Variations des Prix a la Consommation,” Bulletin de la Banque Nationale de Belgique, December.
Banerjee, A., Dolado, J.J., Hendry, D.F., and Smyth, G.W. (1986), “Exploring Equilibrium Relationships in Econometrics Through State Models: Some Monte Carlo Evidence,” Oxford Bulletin of Economics and Statistics, Vol. 42.
Belgium, Département Communication de la Générale de Banque, “Le marché beige de l’emploi,” Bulletin de la Générale de Banque (Brussels, 1992).
Cuthbertson, K., Hall, S.G., and Taylor, M.P. (1992), Applied Econometric Techniques (Ann Arbor: The University of Michigan Press).
Engle, R. and Granger, C.W.J. (1987), “Cointegration and Error Correction: Representation, Estimation and Testing,” Econometrica, Vol. 55.
Gregory, R. (1985), “Wages Policy and Unemployment in Australia,” presented at the Chelwood Gate Conference on Unemployment, Chelwood Gate.
Hendry D.F. and Mizon, G.E. (1990), “Evaluating Dynamic Econometric Models by encompassing the VAR,” Nuffield College, Oxford University and Southampton University, mimeo.
Jackman, R. and Layard, R. (1987), “Innovative Supply-Side Policies to Reduce Unemployment,” in P. Minford, ed., Monetarism and Macroeconomics, (London: Institute of Economic Affairs).
Jackman, R. and Layard, R. (1991), “Does Long-term Unemployment Reduce a Person’s Chance of a Job? A Time series Test,” Economica, Vol. 58, No. 229.
Jackman, R. Layard, R. and Savouri, S. (1991), “Mismatch: A Framework for Thought,” in F. Padoa Schioppa, ed., Mismatch and Labour Mobility, CEPR (Cambridge: Cambridge University Press).
Johansen, S. and Juselius; K. (1990), “Maximum Likelihood Estimation and Inference on Cointegration--with Applications to the Demand for Money,” Oxford Bulletin of Economics and Statistics, Vol. 52.
Layard, R., Nickell, S.J. and Jackman, R. (1991), Unemployment. Macroeconomic Performance and the Labour Market, (Oxford: Oxford University Press).
Moghadam, R. and Wren-Lewis, S. (1990), “Are Wages Forward Looking?”, Centre for Labor Economics, LSE Discussion Paper No. 375 (London: London School of Economics and Political Science).
Mulkay, B. and Van Audenrode, M. A. (1993), “Creation, destruction d’emplois et chomage: le cas de la Belgique,” Economie & Prévision, Vol. 2, No. 108.
Newell, A. and Symons, J. (1987), “Corporatism, Laissez-Faire and the Rise of Unemployment,” European Economic Review, Vol. 31, No. 3.
Nickell, S. J. (1984), “The Modelling of Wages and Employment” in Econometrics and Quantitative Economics, D. Hendry and K. Wallis, eds. (Oxford: Basil Blackwell).
The authors would like to thank, without implication, Ke-young Chu, Paul Masson, and the researchers at the National Bank of Belgium for helpful comments and suggestions.
The official unemployment figures published in the Bulletin de Statistique are usually considerably higher than the “standardized” or “harmonized” figures provided by the OECD and the EC. The main reason for the discrepancy is the method of compiling the figures. The OECD and EC measures are based on surveys of the labor force whereas the official Belgian data are based on the number of unemployment benefit claimants. Also the official unemployment rate is expressed as a proportion of the insured labor force rather than the total labor force.
In fact employment would follow a random walk with drift. The drift would be positive when insiders chose a wage so that on average employment exceeds membership, to guard against loss of employment in the case of unexpected shocks (see Blanchard and Summers (1986), p. 34). Note also that the result of full persistence is weakened to the extent that insiders become more adverse to risking unemployment when unemployment is high (and new job prospects low) and set wages more cautiously as a consequence.
The non-employment rate is defined as:
where U is unemployment, E is employment and PW is population of working age.
During the same period the aggregate participation rate increased from 64.3 percent to 67.9 percent: a drop in male participation being more than offset by an increase in female participation.
Wages were only partially indexed: a portion equivalent to the minimum wage was allowed to increase in line with the CPI.
Enterprises which did not achieve the targeted employment increase had to contribute the gains from the reduction in wages to a special employment fund.
In 1986 prices actually fell.
Measures (i) and (ii) left the employers’ labor costs unchanged after the application of the Royal Decree No. 180; however, they reduced employees’ real disposable income to help finance the social security deficit.
Export market share, real wages and the cost of borrowing.
This new index was named l’index santé.
a and s cannot be identified separately from estimation of the wage equation. However, a must be positive if the ratio described above is larger that 1/2. a can be directly obtained from the employment equation.
Nickell (1984) assumes that wages are the outcome of a Nash bargain which maximizes the product of the firm’s profit and the union’s utility. Real wages and the level of benefits affect union’s utility function.
These data were kindly provided by the Belgian National Bank. The reservation wage, b, is proxied by the unemployment insurance replacement ratio. t1, t2, t3 are proxied by the ratio of employers’ contributions to the wagebill, the ratio of social security and income taxes paid by households to take home pay, and indirect taxes as a proportion of consumer expenditures, respectively.
The short-term unemployment rate is defined as SUR=SU/(E+SU) and the long-term unemployment rate as LUR=LU/(E+LU), where SU is the number of those who have been unemployed for less than a year and LU is those who have been unemployed for more than a year.
See Layard and Nickell (1986). Even if LUR is significant and negative, the impact will have to be as large as SUR in order to reject hysteresis.
The short-term and long-term unemployment variables only exist from 1987:1. The earlier data was interpolated from annual observations.
The industry classification is NACE-CLIO. Except for industries with NACE 23, 35, 36, 37, 44, 45, and 49, there are at least 10 enterprises in each industry (see Data Annex for definitions). In regressions with the industrial unemployment rate, two industries (37 and 49) are dropped because the unemployment data are not available.
Averages for the 7 year period.
For industry unemployment, the reported data were aggregated across subsector for some sectors, and when data was not available, the unemployment in related sectors had to be used. The Statistical Abstract and Statistiques Sociales needed to be combined as the Statistical Abstract does not cover all industries (in particular, NACE 23, 32, 34, and 36, are not covered). Employment and unemployment for NACE 24 are defined as the sum of unemployment in glass, diamond, and ceramics; for 45 as the sum of footwear and clothing; and for 47 as the sum of paper and rubber. For NACE 35 and 36, the unemployment rate in vehicle manufacturing is used. For NACE 37 and NACE 49, there is no unemployment data which corresponds to the industry definition. The industrial wholesale price index and industrial wages are from the Statistical Abstract, and could easily be linked to the industrial classification of the enterprise data.
All the time series results in this paper are obtained using MICROFIT version 3.1; see Pesaran and Pesaran (1991).
t-statistics are given in brackets.
All the equations fail the normality test and the LM test for serial correlation. Equations (iii) and (v) also fail Ramsey’s test for functional form.
This is done using the Engle-Granger (1987) two step procedure. This involves first estimating a long-run vector with cointegration techniques and then imposing the lagged residuals from this vector on a freely estimated error correction model (ECM). This methodology has the advantage of separating the stationary variables (which contribute to the dynamics) from those which are integrated of order 1 or higher (these variables affect long-run behavior).
We found that all the variables appearing in (8) were non-stationary, in fact they were all integrated of order one. The long-run equation is estimated using OLS. Stock (1984) demonstrates that, in the case of co-integrated nonstationary series, OLS estimates of the co-integrating vector are not only consistent, they converge on their true parameter values much faster than in the stationary case.
In this table w - p (the real wage), y - n (smoothed productivity) and pm - p (the import tax wedge), are in logs while t2 (the direct tax wedge), t3 (the indirect tax wedge), SUR (the short-term unemployment rate), and LUR (the long-term unemployment rate), are in percent as in equation (8) above.
DF and ADF in Table 4 stand for Dickey-Fuller and augmented Dickey-Fuller tests of stationarity of the residuals.
We also tested for cointegration of SUR and LUR. This was rejected.
The aggregate wage variable, wagg, was left out of these regressions because of collinearity with LTU.
In this respect the plan d’accompagnement and the recently announced plan d’embauche des jeunes will be helpful.