The model is populated with entrepreneurs, who are able to create jobs. In this paper we assume that entrepreneurs can choose ex ante to search for either a domestic low-skill worker, or separately for a foreign worker. This, in effect, segments the low-skilled labor market into two separate markets, meaning that the analytical structure is applicable to both, and the markets may be considered separately. An entrepreneur will attempt to create a job by posting a vacancy whenever it is profitable to do so, meaning that the equilibrium number of vacancies posted is determined by a zero profit condition
where k is the cost of posting the vacancy, q(.)is the rate at which entrepreneurs meet searching workers, is the discount factor, and J(ε) is the value received by the entrepreneur from being matched with a worker. As mentioned in the text, these jobs are subject to idiosyncratic uncertainty, captured by the shock ε, which makes its value change. However, all new matches begin with the highest value of
where f (ε) is the output generated by the match, w(ε) is the negotiated wage, and γ is the probability that the job will be subject to a change in its output. If the value of continuing with the worker in this current position falls below zero, the match is destroyed. The shock, ε, is drawn from a distribution, F(ε). Although somewhat nonstandard, the process for idiosyncratic productivity defines a persistent stochastic process.
The value of working for an employed worker is given by an analogous Bellman equation to (A2)
where the Emax operator reflects the fact that the wage bargain means that the worker and entrepreneur agree on the whether the match should continue. An unemployed worker generates a value that reflects the value that accrues to forming a match with an entrepreneur
where p(.) is the probability that an unemployed worker receives a job offer.
The costly and time consuming matching process is assumed to be represented in a very stylized way, with the number of matches formed in any period being a function of the number of vacancies and unemployed workers, m(u, v). As is common, we assume this is a constant returns-to-scale function, meaning the job- and worker-finding rates only depend on the tightness of the labor market. Given all of this, the finding rates can be represented by:
The bargain process is assumed to satisfy the Nash axiomatic solution, meaning that wages paid must be sufficient so that workers receive their value for searching, plus a share (equal to their bargaining power, θ) of the “surplus” generated by the match, i.e., Ve(ε)= Vu+θ[J(ε)+Ve(ε)–Vu]. Using these conditions, one can derive the conditions for job creation and destruction in the case that wages are determined by decentralized bargaining, with the equilibrium resembling that in Figure 5, except that the JD relation is upward sloping (Mortensen and Pissarides, 1994). Hosios (1990) shows that, given the matching frictions, only when the elasticity of the matching function with respect to vacancies equals θ is the equilibrium efficient. The equilibrium creation and destruction decision rules
In the case where the government imposes a wage schedule that is not bargained,
The resulting equilibrium creation and destruction decision rules, and the expressions underlying the JC and JD curves in Figure 5 are, therefore,
It is easy to show that for linear production functions, the equilibrium wage function (w(ε)) will be linear in productivity: w(ε) = w0+w1ε. The wage compression assumed in this paper assumes that, for a constant distribution of productivity across jobs, average wages grow by g percent and the slope of the wage schedule becomes flatter by a factor φ (φ = 1 means no within-market compression). This means that the assumed compressed wage schedule is
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Prepared by Nathan Porter.
The 2000 Census reported that 90 percent of the unemployed have not completed the high school certificate.
A common measure of mismatch in the labor market—the variance of relative unemployment rates across categories—suggests that mismatch may have actually declined between the 1990 and 2000 censuses. Using labor market data by educational category, the variance of relative unemployment rates has declined from 17 percent to 12 percent. The intuition for this measure is that the greater the dispersion in unemployment rates, the greater the mismatch in the labor market (Layard, Nickell, and Jackman, 1991, Ch. 6).
In this context, the fragility of a job refers to the likelihood it is destroyed. By relative wage compression we mean that—possibly due to centralized wage determination—the wages paid to workers are artificially more similar than they would be if wages were the result of firm-level bargaining (Bertola and Rogerson, 1997). This means that differential wages do not fully reflect differences in productivity or working conditions. More specifically, this could mean that wages in a particular sector are “linked” to wages in a higher paying sector (cross-market compression), and/or that wages within an industry are closer to each other, although the average wage is much the same (within-market compression). Invariably, both of these types of compression occur.
For example, the RO for the catering industry defines “assistant barman,” “barman,” and “head barman” as separate occupations, with each unable to perform the duties of the other—an “assistant barman” cannot prepare a drink if a “barman” is at the bar. These regulations do not cover the EPZ sector, and are not expected to cover new information, communications and technology (ICT) activity.
With textiles accounting for almost 90 percent of EPZ sector employment, textiles and EPZ will be referred to interchangeably in this section.
The job creation, destruction, and employment growth rates used in this section are calculated by dividing the change in employment between two periods by the average employment in those periods. While slightly different from the standard definition of growth rates, it is consistent with the definition typically applied in the job flows literature—see Davis, Haltiwanger, and Schuh (1997).
Following Davis, Haltiwanger, and Schuh (1997), the job reallocation rate is defined as the sum of job creation and destruction rates. This definition reflects the fact that reallocation of jobs and workers from one type of activity to another typically requires the creation of jobs at expanding enterprises and destruction of jobs at contracting ones. Defined in this way, job reallocation also equals the maximal reallocation of workers induced by the reshuffling of employment opportunities across enterprises. The excess job reallocation rate is defined as job reallocation in excess of absolute employment growth, indicating the reallocation of jobs above the amount required to accommodate net employment changes, and may be also thought of as a measure of “churning.”
This differs from the solution in the standard Mortensen and Pissarides (1994) model where wages are bargained. In that model, there is a negative relation underlying the JD curve, which reflects that a tighter labor market (higher
Since the ability of firms to redeploy workers reduces the value a firm can expect from a worker in any period, it is modeled as a reduction in the level of output expected in any period. That is, with some probability a worker may need to perform the duties of another occupational category. Since employment restrictions inhibit this redeployment, the worker is less valuable.
It is implicitly assumed that all low-skill jobs share the job destruction rate of the EPZ sector. In 2000 the overall unemployment rate was 8.8 percent.
For example, Mauritius does not have estimates of traditional measures of wage dispersion, such as the 90-10 wage differential, or the cross-sectional variance of wages paid.