Narrow Results

Shortage of formal jobs, lack of skills in workforce and increasing human population proliferate the informal sector. This sector provides an opportunity to unskilled workers to gain skills along with earnings. In this paper, a deterministic nonlinear mathematical model is developed to study the effects of informal skill learning and job generation on unemployment. For the formulated system, feasibility of equilibria and their stability properties are discussed. A pertinent quantity (${{ℛ}}_0$), known as the reproduction number, is calculated and it is shown that the formulated system undergoes transcritical, saddle-node, Hopf and Bogdanov–Takens bifurcations on the variation of ${{ℛ}}_0$. The analytically obtained results are validated through numerical simulations. The results obtained from this study indicate that a substantial rate of job generation by self-employed individuals has a stabilizing effect on the system. Moreover, self-employment along with informal skill acquisition through engaging in informal work proves to be an effective measure in curbing the issue of unemployment in society.

The limited availability of formal jobs in developing nations always heightens the challenge for unemployed individuals in securing regular employment. Temporary employment in the informal sector serves as a source to fulfill their basic needs and enhance their employable skills. In this paper, we introduce a nonlinear mathematical model to study the effect of informal and formal jobs on the dynamics of unemployment. For the model formulation, we categorize the labor force into three classes: unemployed, temporary employed, and regularly employed. A separate dynamical variable is used to represent the available temporary vacancies. It is assumed that temporarily employed individuals may transition into regular employment or self-employment. Furthermore, self-employed individuals contribute to generating temporary vacancies within the informal sector. The long-term behavior of the proposed system is analyzed using the qualitative theory of differential equations. A quantity known as the reproduction number of the system is derived, and it is found that the occurrence of multiple bifurcations for the proposed system is influenced by the value of this threshold quantity. Furthermore, we validate our analytical findings numerically. The findings of this study illustrate that an increase in the shifting rate of individuals from temporary to regular employment is not always effective in increasing the number of regularly employed individuals. Additionally, an increase in the transition of temporarily employed individuals into self-employment, coupled with their involvement in creating more temporary jobs, proves beneficial in reducing unemployment.

This chapter derives and compares the welfare effects of tariffs and import quotas in the presence of involuntary unemployment. The framework used is the standard model of a competitive small open economy with many goods and factors. Optimum levels of the respective trade policy instruments are derived, as well as welfare increasing reform strategies. In all cases, the labor intensity of the import competing sectors turns out to be a crucial variable for deriving the welfare effects.

This chapter analyzes the effects of tariff reforms on welfare and market access in a competitive small open economy that is characterized by involuntary unemployment due to non-market clearing wages that are fixed either in terms of the numeraire or in real terms. We show that recent tariff-reform results can be extended to integrated reforms of tariffs and the wage rate, and that the inherent tension between reforms that increase welfare and market access carries over. We also derive welfare increasing tariff-reform strategies that keep the wage rate constant, and show that this tension may be attenuated.

This chapter analyzes the effects of global and national technological change on employment and relative wages in an integrated two-country world (“Europe” and “America”), where both countries are characterized by equilibrium unemployment due to fair wage constraints. The asymmetry between the countries arises from country-specific preferences towards wage inequality, with Europe’s preferences being more egalitarian. Furthermore, we look at integration between this two-country world and a third country (“low wage sout”). We derive an analytical tool, the Virtual Integrated Equilibrium, that allows us to adapt Dixit and Norman’s Integrated Equilibrium approach to a situation where both countries have endogenous unemployment levels.

In this chapter, we introduce the fairness approach to efficiency wages into a standard model of international fragmentation. This gives us a theoretical framework in which wage inequality and unemployment rates are co-determined and therefore the public concern can be addressed that international fragmentation and outsourcing to low wage countries lead to domestic job-losses. We develop a novel diagrammatic tool to illustrate the main labor market effects of international fragmentation. We also explore how preferences for fair wages and the size of unemployment benefits govern the employment effects of outsourcing and critically assess the role of political intervention that aims to reduce unemployment benefits under internationally fragmented production.

This chapter develops a model that incorporates workers’ fair wage preferences into a general equilibrium framework with monopolistic competition between heterogeneous firms à la Melitz (2003). By assuming that the wage considered to be fair by workers depends on the productivity and thus the economic success of the firm they are working in, we can study the determinants of profits, involuntary unemployment and within-group wage inequality in a unified framework. We use this model to investigate the effects of globalization. In a benchmark case with identical costs of entering domestic and foreign markets, there are gains from trade accompanied by distributional conflicts, which have so far not been accounted for in the literature: A simultaneous increase of average profits and involuntary unemployment as well as a surge in within-group wage inequality.

This chapter analyzes the effects of redistribution in a model of international trade with heterogeneous firms in which a fair-wage effort mechanism leads to firm-specific wage payments and involuntary unemployment. The redistribution scheme is financed by profit taxes and gives the same absolute lump-sum transfer to all workers. International trade increases aggregate income and income inequality, ceteris paribus. If, however, trade is accompanied by a suitably chosen increase in the profit tax rate, it is possible to achieve higher aggregate income and a more equal income distribution than in autarky, provided that the share of exporters is sufficiently high.

We develop a model of international trade between two symmetric countries that features inter-group inequality between managers and workers, and also intra-group inequality within each of those two groups. Individuals are heterogeneous with respect to their managerial ability, and firms run by more able managers have a higher productivity level and make higher profits. There is rent sharing at the firm level due to fair wage preferences of workers, and hence firms with higher profits pay higher wages in equilibrium in order to elicit their workers’ full effort. We show that in this framework international trade leads to a self-selection of the best firms into export status, with exporting firms having to pay a wage premium. Aggregate welfare increases, but there is also larger inequality along multiple dimensions: Involuntary unemployment and income inequality between managers and workers increase, and so does inequality within these two subgroups of individuals, as measured by the respective Gini coefficients.

Many European countries restrict immigration from new EU member countries. The rationale is to avoid adverse wage and employment effects. We quantify these effects for Germany. Following Borjas (in Q J Econ CXVIII(4): 1335–1374, 2003), we estimate a structural model of labor demand, based on elasticities of substitution between workers with different experience levels and education. We allow for unemployment which we model in a price-wage-setting framework. Simulating a counterfactual scenario without restrictions for migration from new EU members countries in Germany, we find moderate negative wage and employment effects for incumbent foreigners, but positive effects for natives. Our results indicate that for the native German population as a whole the immigration restrictions are not welfare enhancing.

This chapter provides an empirical investigation of the main determinants of entrepreneurial activities across three groups of countries over the period 2004–2008, by specifically examining the importance of institutional setting and economic growth on entrepreneurial activities. The classification of countries is based on the Economic Freedom Index and the World Economic Forum (2011) which groups them on the basis of whether they are innovation-driven, efficiencydriven, or factor-driven countries. On the one hand, empirical results find a positive and significant role for economic freedom to accelerate entrepreneurial activities and growth in innovation and efficiency-driven countries characterized by strong institutional systems. On the other hand, the results suggest that in factor-driven countries characterized by relatively less economic freedom and weak institutions, there is a significant negative relationship between economic freedom and entrepreneurial activities.