Table Of ContentModelling
the Labour Market
INTERNATIONAL STUDIES IN ECONOMIC MODELLING
Series Editor
H. Motamen
Executive Director,
Canadian Imperial Bank of Commerce,
Securities Europe Ltd,
London
Economic Modelling in the OECD Countries
H. Motamen
Input-output Analysis
M. Ciaschini
In preparation
Models of Disequilibrium and Shortage in the Centrally Planned Economies
C. Davis and W. Charemza
Economic Models of Latin America
D.E. Hojman
Economic Models of Trade Unions
P. Garonna
Modelling
the Labour Market
Edited by
Michael Beenstock
Lady Davos Professor of Economics,
Hebrew University, Jerusalem
London
CHAPMAN AND HALL
New York
First published in 1988 by
Chapman and Hall Ltd
11 New Fetter Lane, London EC4P 4EE
Published in the USA by
Chapman and Hall
29 West 35th Street, New York, NY 10001
© 1988 Chapman and Hall Ltd
Softcover rt'print of the hardcover 1st edition 1988
All rights reserved. No part of this book may be reprinted,
or reproduced or utilized in any form or by any electronic,
mechanical or other means, now known or hereafter
invented, including photocopying and recording, or in
any information storage and retrieval system, without
permission in writing from the publisher.
British Library Cataloguing in Publication Data
Moddling the labour market. - (ImernaTional
studies in economic modelling).
I. Labour ~upply - Great Britain -
Econometric models
I. BeensTock, Michael ll, Series
331.12'0941 HDS765.A6
e·ISBN 978-94-009-12-(13·8
DOl ,10.1(1071978·94·009-1203·8
Library of Congress Cataloging in Publication Data
Modelling the labour market/edited by Michael BcensTock.
p, cm, - (international studies in economic modelling)
Includes bibliographies and index,
ISBN 978·94-0 10-703505
I. Labor supply - GreaT BriTain - Econometric models.
I. Becnslock, Michael, 1!J46- II. Tide, Modelling the labor
market, Ill. Serics.
HD5765.A6M63 1988
331.12'0724 - dcl9 87·2.3084
CIP
Contents
Contributors Vll
Introduction to the Series viii
Preface x
1 The labour market: theory and experience 1
Christopher Bliss
1.1 The concept of the labour market 1
1.2 The supply and demand for labour 2
1.3 Models of unemployment 7
1.4 Macroeconomics and the labour market 14
1.5 The Phillips curve and the NAIRU 17
1.6 Some features of the data 19
References 22
2 Some formal models of the aggregate labour market 25
Martyn Andrews
2.1 Introduction 25
2.2 Labour demand 26
2.3 Some formal models 30
Appendix A 44
References 46
3 The disequilibrium approach to modelling the labour market 49
Stephen Hall and Brian Henry
3.1 Introduction 49
3.2 The multimarket non-clearing model 52
3.3 The labour market in disequilibrium 54
3.4 Empirical results 60
3.5 Policy implications 65
3.6 Conclusions 68
References 68
4 A neoclassical model of the UK labour market 71
Michael Beenstock and Peter Warburton
VI Contents
4.1 Introduction 71
4.2 Theory 72
4.3 Econometric results 81
4.4 Simulations 89
Appendix A 100
References 103
5 A new classical model of the labour market 105
Patrick Minford
5.1 The model in outline 106
5.2 The labour market in detail 110
5.3 The demand for labour 120
5.4 Responses to critics 139
5.5 Conclusions 142
Acknowledgement 143
References 143
6 Imperfect competition and the labour market 145
Stephen Nickell
6.1 Introduction 145
6.2 Price and employment behaviour 145
6.3 Wage determination 149
6.4 The labour market in a macromodel 152
6.5 Empirical analysis of the British labour market 160
6.6 Summary and conclusions 166
References 166
7 An international perspective 169
Martyn Andrews
7.1 Introduction 169
7.2 Multi-country studies: some comments 170
7.3 Selected applications of labour market models 173
7.4 Multi-country studies: some examples 184
7.5 Institutional characteristics 188
7.6 Concluding comments 193
Acknowledgements 195
References 195
Index 199
Contributors
Martyn Andrews Department of Econometrics and Social Statistics,
University of Manchester, UK
Michael Beenstock Hebrew University, Jerusalem
Christopher Bliss Nuffield College Oxford, UK
Stephen Hall Economics Division, Bank of England, London, UK
Brian Henry National Institute of Economic and Social Research,
London, UK
Patrick Minford Department of Economics and Accounting, Univer
sity of Liverpool, UK
Stephen Nickell Institute of Economics and Statistics, Oxford, UK
Peter Warburton Shearson Lehman, London, UK
Introduction to the Series
There has been a growing dependence in the past two decades on modelling as
a tool for better understanding of the behaviour of economic systems, and as an
aid in policy and decision making. Given the current state of the art globally,
the introduction of a series such as this can be seen as a timely development.
This series will provide a forum for volumes on both the theoretical and applied
aspects of the subject.
International Studies on Economic Modelling is designed to present compre
hensive volumes on modelling work in various areas of the economic discipline.
In this respect one of the fundamental objectives is to provide a medium for
ongoing review of the progression of the field.
There is no doubt that economic modelling will figure prominently in the
affairs of government and in the running of the private sector, in efforts to achieve
a more rational and efficient handling of economic affairs. By formally
structuring an economic system, it is possible to simulate and investigate the
effect of changes on the system. This in turn leads to a growing appreciation of
the relevance of modelling techniques. Our aim is to provide sufficient space for
authors to write authoritative handbooks, giving basic facts with an overview of
the current economic models in specific areas and publish a useful series which
will be consulted and used as an accessible source of reference.
The question may arise in some readers' minds as to the role of this series
vis-a-vis other existing publications. At present, no other series possesses the
characteristics of International Studies on Economic Modelling and as such cannot
fill the gap that will be bridged by it, while those journals which focus in this
area do not present an exhaustive and up-to-date overview of a particular subject
and all the developments in the field. Other journals which may contain economic
modelling papers are not sufficiently broad to publish volumes on all aspects of
economic modelling which this series is designed to cover.
A variety of topics will be included encompassing areas of both micro and
macroeconomics, as well as the methodological aspects of model construction.
Naturally, we are open to suggestions from all readers of, and contributors to,
the series regarding its approach and content.
Introduction to the Series IX
Finally, I would like to thank all those who have helped the launch of this series.
The encouraging response received from authors who have contributed the
forthcoming volumes and from the subscribers to the series has indicated the need
for such a publication.
Homa Motamen
London, Dec 1987
Preface
It is generally agreed that the operation of the labour market lies at the heart of
macroeconomic activity. Following Keynes' attack on the postulates of the classics
in The General Theory a number of labour market paradigms have been proposed
including the Phillips curve, new classical and union bargaining models. These
paradigms usually form the centrepiece of any good text on macroeconomic
theory. Our purpose in this volume is not to restate these paradigms but to
explore the extent to which they might be empirically modelled. To this end the
volume includes a set of econometric models of the UK labour market where
each contribution relates very closely to one of the principal paradigms.
The purpose of this collection is threefold. First and foremost we wanted to
present an integrated set of case studies in applied econometrics with reference
to labour market modelling. In doing so we hope the volume will appeal to third
year undergraduates and postgraduate students studying applied econometrics
and labour economics. Secondly, the contributions have been carefully selected
to illustrate the main paradigms since each contribution is intellectually self
contained. It is arguable that this may be disadvantageous as far as the truth is
concerned if eclecticism is preferable. On the other hand it has pedagogic
advantages in drawing sharp distinctions between the various approaches.
The third and least important purpose of the collection is policy design. We
make no attempt to judge which of the models is the best. Non-nested testing
of individual equations is difficult enough; non-nested testing of entire models
raises methodological questions that lie well beyond our present terms of reference.
All the models purport to explain similar phenomena such as the growth in
unemployment and it is left to the reader to judge the appropriateness of the
competing models. This is all the more apposite because to a large extent the
models are constructed from broadly similar time-series aggregates.
The research projects that lie behind the contributions were not planned in
advance. But better co-ordination could most probably not have been achieved
had one tried. Stephen Hall and Brian Henry have tried to estimate a 'Keynesian'
model of the labour market in which employment is equal to the smaller of
labour supply or demand. However, the demand for labour is constrained by
expected aggregate demand but is also influenced by factor prices. In a strictly
Keynesian model money wages are rigid downwards. Nevertheless, in Hall and
