Essays on labour and development economics

Abstract

This thesis presents three essays, each seeking to deepen our understanding of labour markets. The first essay studies the response of real wages and hours of new hires to the business cycle during the UK’s Great Recession. The second essay analysis in how far the assumption of rational expectations in the Mortensen-Pissarides model is required for the economy to converge to an equilibrium. In particular, it asks if it is possible for economic agents to use simple linear forecast rules and still ensure convergence to the rational expectations equilibrium. The final essay seeks to determine whether labour income shares at the sectoral level are constant across countries, as is usually assumed in the literature, and whether this assumption quantitatively matters. Therefore, it takes the input-output structures across countries into account, and conducts a development accounting exercise. Real wages and hours in the Great Recession: Evidence from firms and their entry-level jobs Using employer-employee panel data, I provide novel facts on how real wages and working hours within jobs responded to the UK’s Great Recession. In contrast to previous studies, my data enables me to address the cyclical composition of jobs. I show that firms were able to respond to the Great Recession with substantial real wage cuts and by recruiting more part-time workers. A one percentage point increase in the unemployment rate led to an average decline in real hourly wages of 2.8 per cent for new hires and 2.6 per cent for job stayers. Hours of new hires in entry-level jobs were also substantially procyclical, while job-stayer hours were nearly constant. My findings suggest that models assuming rigid labour costs of new hires are not helpful for understanding the behaviour of unemployment over the business cycle. Unemployment and econometric learning I apply well-known results of the econometric learning literature to the Mortensen-Pissarides real business cycle model. Agents can always learn the unique rational expectations equilibrium (REE), for all possible well-defined sets of parameter values, by using the minimum-state-variable solution to the model and decreasing gain learning. From this perspective, the assumption of rational expectations in the model could be seen as reasonable. But using a parametrisation with UK data, simulations show that the speed of convergence to the REE is slow. This type of learning dampens the cyclical response of unemployment to small structural shocks. Measuring sectoral income shares: Accounting for input-output structures across countries I use input-output tables to measure the labour income shares of the goods and the services sector for a large cross-section of mostly developed countries. I present two novel findings: sectoral labour income shares significantly increase with the level of development, and within-country differences between these income shares are uncorrelated with the level of development. These cross-country differences are not caused by variation in the input-output structure or final demand, but originate at the production-side of the economy. I measure sectoral total factor productivity using a development accounting framework to assess the quantitative importance of my findings. The goods sector of less developed countries is relatively less productive than the services sector; assuming that the values of the sectoral labour income shares across countries are identical to their corresponding U.S. values leads to an underestimation of productivity differences across countries. All findings are robust to different adjustments for the labour income of the self-employed.