This paper develops a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary. The proposed tests are based on standard F- and t-statistics used to test the significance of the lagged levels of the variables in a univariate equilibrium correction mechanism. The asymptotic distributions of these statistics are non-standard under the null hypothesis that there exists no level relationship, irrespective of whether the regressors are I(0) or I(1). Two sets of asymptotic critical values are provided: one when all regressors are purely I(1) and the other if they are all purely I(0). These two sets of critical values provide a band covering all possible classifications of the regressors into purely I(0), purely I(1) or mutually cointegrated. Accordingly, various bounds testing procedures are proposed. It is shown that the proposed tests are consistent, and their asymptotic distribution under the null and suitably defined local alternatives are derived. The empirical relevance of the bounds procedures is demonstrated by a re-examination of the earnings equation included in the UK Treasury macroeconometric model. Copyright © 2001 John Wiley & Sons, Ltd.

/pdf/bounds-testing-approaches-to-the-analysis-of-level-un6p8czliu.pdf

Bounds testing approaches to the analysis of level relationships

In 1974 an article appeared in Science magazine with the dry-sounding title “Judgment Under Uncertainty: Heuristics and Biases” by a pair of psychologists who were not well known outside their discipline of decision theory. In it Amos Tversky and Daniel Kahneman introduced the world to Prospect Theory, which mapped out how humans actually behave when faced with decisions about gains and losses, in contrast to how economists assumed that people behave. Prospect Theory turned Economics on its head by demonstrating through a series of ingenious experiments that people are much more concerned with losses than they are with gains, and that framing a choice from one perspective or the other will result in decisions that are exactly the opposite of each other, even if the outcomes are monetarily the same. Prospect Theory led cognitive psychology in a new direction that began to uncover other human biases in thinking that are probably not learned but are part of our brain’s wiring.

Thinking fast and slow.

Part 1 Unemployment in the model of balanced growth: the labour market long-run equilibrium and balanced growth adjustment dynamics. Part 2 further ananlysis of the labour market: search intensity and job advertising.

Equilibrium Unemployment Theory

Emotion and Adaptation

NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS by Richard H. Thaler and Cass R. Sunstein Penguin Books, 2009, 312 pp, ISBN 978-0-14-311526-7This book is best described formally as a general explanation of and advocacy for libertarian paternalism, a term coined by the authors in earlier publications. Informally, it is about how leaders, systems, organizations, and governments can nudge people to do the things the nudgers want and need done for the betterment of the nudgees, or of society. It is paternalism in the sense that "it is legitimate for choice architects to try to influence people's behavior in order to make their lives longer, healthier, and better", (p. 5) It is libertarian in that "people should be free to do what they like - and to opt out of undesirable arrangements if they want to do so", (p. 5) The built-in possibility of opting out or making a different choice preserves freedom of choice even though people's behavior has been influenced by the nature of the presentation of the information or by the structure of the decisionmaking system. I had never heard of libertarian paternalism before reading this book, and I now find it fascinating.Written for a general audience, this book contains mostly social and behavioral science theory and models, but there is considerable discussion of structure and process that has roots in mathematical and quantitative modeling. One of the main applications of this social system is economic choice in investing, selecting and purchasing products and services, systems of taxes, banking (mortgages, borrowing, savings), and retirement systems. Other quantitative social choice systems discussed include environmental effects, health care plans, gambling, and organ donations. Softer issues that are also subject to a nudge-based approach are marriage, education, eating, drinking, smoking, influence, spread of information, and politics. There is something in this book for everyone.The basis for this libertarian paternalism concept is in the social theory called "science of choice", the study of the design and implementation of influence systems on various kinds of people. The terms Econs and Humans, are used to refer to people with either considerable or little rational decision-making talent, respectively. The various libertarian paternalism concepts and systems presented are tested and compared in light of these two types of people. Two foundational issues that this book has in common with another book, Network of Echoes: Imitation, Innovation and Invisible Leaders, that was also reviewed for this issue of the Journal are that 1 ) there are two modes of thinking (or components of the brain) - an automatic (intuitive) process and a reflective (rational) process and 2) the need for conformity and the desire for imitation are powerful forces in human behavior. …

Nudge: Improving Decisions about Health, Wealth, and Happiness

This book provides an accessible, balanced account of the insider-outsider theory of labor market activity. It focuses on how "insiders" (incumbent employees whose jobs are protected by various labor turnover costs) get market power, what they do with that power, and how their activities affect the "outsiders" (who are either unemployed or work in the informal sector). The book examines the effects of insiders' activities on wages, employment, and unemployment; discusses the associated policy implications; and relates the insider-outsider theory to other theories of labor market activity.The central part of the book consists of a series of previously published articles that have been edited to convey a single coherent account of the insider-outsider theory. Chapters are preceded by overviews summarizing the main ideas and relating them to the book's underlying theme.Assar Lindbeck is Professor of International Economics and Director of the Institute of International Economics at the University of Stockholm. Dennis J. Snower is Professor of Economics, Birkbeck College, University of London.

The insider-outsider theory of employment and unemployment

Wage Setting, Unemployment and Insider-Outsider Relations

The paper analyzes an important aspect of the contemporary reorganization of work within firms: the shift from "Tayloristic" organization (characterized by specialization by tasks) to "holistic" organization (featuring job rotation, integration of tasks and learning across tasks). We examine four driving forces behind this restructuring process: advances in production technologies promoting technological task complementarities, advances in information technologies promoting informational task complementarities, changes in worker preferences in favor of versatile work, and advances in human capital that make workers more versatile. Our analysis can also help explain the recent widening of wage differentials and disparities in job opportunities, not only between occupational, educational, and industry groups, but also within these groups.

/pdf/multitask-learning-and-the-reorganization-of-work-from-2w0unjc2ge.pdf

Multitask Learning and the Reorganization of Work: From Tayloristic to Holistic Organization

This article surveys the insider-outsider theory, which analyzes the behavior of economic agents in markets were some participants have more privileged positions than others. Incumbent workers (insiders) in the labor market enjoy more favorable employment opportunities than others (outsiders), on account of labor turnover costs (e.g. costs associated with hiring, training, firing, and insiders’ ability to punish underbidding outsiders). The theory provides an explanation of existence and persistence of unemployment, and helps account for the different employment experiences in Europe and the United States. The article also discusses policy implications and examines how the theory is related to unions and social norms. Assar Lindbeck is Professor of International Economics, Institute for International Economic Studies, University of Stockholm, and fellow at the Research Institute of Industrial Economics, IUI, both in Stockholm, Sweden. Dennis J. Snower is Professor of Economics, Birkbeck College, University of London, Research Fellow, Center for Economic Policy Research, both in London, United Kingdom; and Program Director at IZA, in Bonn, Germany. Their e-mail addresses are Assar Lindbeck and Dennis J. Snower 1 and , respectively. The insider-outsider theory examines the behavior of economic agents in markets were some participants have more privileged positions than others. In the labor market, incumbent workers, the “insiders,” often enjoy more favorable employment opportunities than the “outsiders.” The reason for this disparity is costs that firms incur when they replace insiders by outsiders – labor turnover costs for short. These can come in many forms, the most obvious ones being the costs of hiring, firing and firm-specific training, but they can also arise from insiders’ attempts to resist competition with outsiders by refusing to cooperate with or harassing outsiders who try to underbid the wages of incumbent workers. Since for reasons to be explained below these costs are borne, at least in part, by the employers, they give the insiders market power. The insiders use this power to push their wage above the market-clearing level, but firms do not try to replace them with outsiders since it would be costly to do so. The insider-outsider theory then proceeds to examine the implications of this behavior for employment and unemployment (Lindbeck and Snower, 1984, 1986). The theory was originally constructed as a microeconomic foundation of the existence of unemployment, hence an explanation for the absence of wage underbidding even though many unemployed workers would like to work for wages lower than existing insider wages, normalized for productivity differences. The theory, however, has also been applied empirically to more specific labor market issues, like the different employment experiences in Europe and the United States in Assar Lindbeck and Dennis J. Snower 2 recent decades. The insider-outsider distinction refers to a wide number of divides: employed versus unemployed workers, formalversus informal-sector employees, employees with high versus low seniority, unionized versus non-unionized workers, workers on permanent versus temporary contracts, skilled versus unskilled workers, the short-term versus the long-term unemployed, and so on. These distinctions also translate into social differences. In many developed countries nowadays growing attention is devoted to the phenomenon of “social exclusion”. Some individuals, families and other social groups are excluded from the mainstream networks of social relations within a society. They are typically unemployed or working at temporary, lowgrade, or dead-end jobs, and finance much of their consumption out of transfer payments (e.g. from social assistance programs, their parents’ incomes) the black market, or even criminal activities. They often live in the underclass neighborhoods of large cities, with meager social services, poor schooling, and scant police protection. These are the real “outsiders” in society, and their outsider position in the labor market is an important source of their social exclusion. These consequences are sometimes accentuated by rent control, which creates insiders and outsiders in the market for rented apartments as well; this group comprises individuals with poor networks, often as a result of their weak labor market position. In labor economics there are three main ways of explaining why some workers face less Assar Lindbeck and Dennis J. Snower 3 favorable employment conditions than others do. These correspond to the three general reasons why firms may be unwilling to replace their current employees by outsiders, even when the outsiders are willing to work at wages that would more than compensate the firm for insider-outsider productivity differences: First, legislation may keep the wage above its market-clearing level (the minimum-wage explanation). Second, firms may not accept the outsiders’ underbidding, since a fall in the wage may reduce productivity or increase the rate of labor turnover (the efficiency wage explanation). And third, it is not in the insiders’ interests to permit outsider underbidding and the insiders can impose their interests on their employers, since the insiders’ positions are protected by labor turnover costs (the insider-outsider theory explanation). The labor union and wage bargaining literature falls into the third category of explanation, since the insider-outsider theory provides a rationale for unions, explains what gives unions their clout and identifies sources of unions’ wage bargaining power. But the theory applies to far more than the labor market and the housing market. In general, whenever a buyer faces a cost of switching from its current supplier to another one, the current supplier thereby gains market power, which can be exploited by raising the price. For example, if product or credit market regulations make it costly for new firms to enter, then consumers will find it costly to abandon the existing suppliers in favor of new suppliers, and thereby the existing suppliers gain market power. Just as product markets become less than perfectly contestable when there are barriers to the entry of firms (Baumol, Panzar and Willig (1982)), so labor markets become less than perfectly contestable when there are labor turnover costs. Assar Lindbeck and Dennis J. Snower 4 This article is an idiosyncratic survey of the insider-outsider theory. Its overriding aim is not to provide a comprehensive summary of the relevant literature, but rather to describe the vision underlying the theory and to discuss salient contributions to the literature in the light of this vision. The rest of this article is divided into four sections. The first concerns the theory of how labor turnover costs influence wages, employment and unemployment. The second section deals with the insider-outsider theory in relation to two important economic institutions: unions and social norms. The third section confronts the relevant empirical evidence. The last section concludes by briefly presenting some policy implications.

https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.15.1.165

Insiders versus Outsiders

This book provides an accessible, balanced account of the insider-outsider theory of labor market activity. It focuses on how "insiders" (incumbent employees whose jobs are protected by various labor turnover costs) get market power, what they do with that power, and how their activities affect the "outsiders" (who are either unemployed or work in the informal sector). The book examines the effects of insiders' activities on wages, employment, and unemployment; discusses the associated policy implications; and relates the insider-outsider theory to other theories of labor market activity. The central part of the book consists of a series of previously published articles that have been edited to convey a single coherent account of the insider-outsider theory. Chapters are preceded by overviews summarizing the main ideas and relating them to the book's underlying theme.

Dennis J. Snower

Papers

The insider-outsider theory of employment and unemployment

Wage Setting, Unemployment and Insider-Outsider Relations

Multitask Learning and the Reorganization of Work: From Tayloristic to Holistic Organization

Insiders versus Outsiders

The Insider-Outsider Theory of Employment and Unemployment