UNEMPLOYMENT IN WESTERN COUNTRIES

INTERNATIONAL ECONOMIC ASSOCIATION PUBLICATIONS

Monopoly and Competition and their Regulation The Economic Consequences of the Size of Nations The Theory of Capital Inflation The Economics of Take-off into Sustained Growth International Trade Theory in a Developing World The Theory of Interest Rates The Economics of Education Problems in Economic Development Price Formation in Various Economies The Distribution of National Income Risk and Uncertainty Economic Problems of Agriculture in Industrial Societies International Economic Relations Backward Areas in Advanced Countries Public Economics Economic Development in South Asia North American and Western European Economic Policies Planning and Market Relations The Gap Between Rich and Poor Nations Latin America in the International Economy Models of Economic Growth Science and Technology in Economic Growth Allocation under Uncertainty Transport and the Urban Environment The Economics of Health and Medical Care The Management of Water Quality and the Environment Agriculture Policy in Developing Countries The Economic Development of Bangladesh Economic Factors in Population Growth Classics in the Theory of Public Finance Methods of Long-term Planning and Forecasting Economic Integration The Economics of Public Services The Organisation and Retrieval of Economic Knowledge The Microeconomic Foundations of Macroeconomics Economic Relations between East and West Econometric Contributions to Public Policy Appropriate Technologies for Third World Development Economic Growth and Resources (5 volumes) The Relevance of Economic Theories

Unemployment in Western Countries

Proceedings of a Conference held by the International Economic Association at Bischenberg, France

Edited by EDMOND MALINVAUD and JEAN-PAUL FITOUSSI

International Economic Association 1980 Softcover reprint of the hardcover 1st edition 1980 978-0-333-28415-5

All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means,

without permission

First published 1980 by THE MACMILLAN PRESS LTD

London and Basingstoke Companies and representatives

throughout the world

Typeset by STYLESET LIMITED

Salisbury Wilts.

British Library Cataloguing in Publication Data

Unemployment in western countries l. Labour supply - Congresses I. Malinvaud, Edmond II. Fitoussi, Jean Paul III. International Economic Association 331.1'379181'2 HD5701 ISBN 978-1-349-16409-7 ISBN 978-1-349-16407-3 (eBook) DOI 10.1007/978-1-349-16407-3

Contents

Acknowledgements

List of Participants

Introduction Edmond Malinvaud and Jean-Paul Fitoussi

PART ONE THE UNEMPLOYMENT PROBLEM

1 Patterns of Unemployment in North America, Western Europe

vii

viii

xi

and Japan R. T. Kaufman 3

Discussion 2 On Certain International Aspects of Employment Policy

T. Timofeev 36

Discussion

3 The Social Economy of Today's Employment Problem in the Industrialised Countries L. Emmerij 58

Discussion

PART TWO INTERNATIONAL TRADE AND UNEMPLOYMENT

4 The Foundations of Free Trade Theory and their Implications for the Current World Recession N. Kaldor 85

Discussion 5 The Effects of Trade between the US and Developing Countries

on US Employment E. Grinols and E. Thorbecke 101

Discussion

vi Contents PART THREE MACROECONOMIC ANALYSIS

6 Involuntary Unemployment A. G. Hines 141

Discussion 7 Macroeconomic Rationing of Employment E. Malinvaud 173

Discussion 8 Structure and Involuntary Unemployment J-P. Fitoussi and N.

Georgescu-Roegen 206

Discussion 9 Unemployment and Inflation: Facts, Theories, Puzzles and

Policies M. Parkin 278

Discussion 10 Recent and Prospective Trends of the Demand for Labour in the

Federal Republic of Germany C. Koellreuter 321

Discussion

PART FOUR THE LABOUR MARKET

11 Wages and Job Availability in Segmented Labour Markets C. C. Holt 385

Discussion

12 Discrimination and Unemployment B. R. Bergmann 420

Discussion

13 New Attitudes to Work B. Sodersten 443

Discussion

14 Income Distribution and Labour Supply L. Frey 469

Discussion

15 Employment Sharing in Japan K. Odaka 496

Discussion

16 Summing up the Conference D. Hague 530

Index 545

Acknowledgements

The scientific planning of this Conference was carried through and completed by J.-P. Fitoussi and E. Malinvaud following preliminary work under the guidance of E. Emmerij. The Association owes its thanks to all three, as well as to the other members of the Programme Committee for the result. The Association is further indebted to E. Malinvaud and J.-P. Fitoussi who edited the volume.

Special gratitude goes again to J.-P. Fitoussi for all the excellent local arrangements, and to the three French institutions which fmanced the local costs and made a generous contribution to the travel - la Direction Generate ala Recherche Scientifique et Technique, le Ministere des Universites, and l'Universite de Strasbourg.

The Association offers its thanks also to the Ford Foundation and to UNESCO whose grants were used to supplement the fmancing recorded above, and to Professor D. Hague, who undertook the responsible task of summarising the discussions.

Programme Committee

J.-P. Fitoussi (France) E. Malinvaud (France) B. van Arkadie (Netherlands) E. Emmerij (Netherlands) L. Frey (Italy) H. Gerfin (FRG) C. Kerr(US) G. Rehn (Sweden) E. Thorbecke (US) T. Timofeev (USSR)

Rapporteur

D. Hague (UK)

List of Participants

Professor Barbara R. Bergmann, University of Maryland, USA. M. DosSantos, Universite Louis Pasteur, Strasbourg, France. Professor H. C. Eastman, University of Toronto, Canada. Professor L. Emmerij, Institute of Social Studies, The Hague, Netherlands. Professor Luc Fauvel (Secretary General, lEA), 54, Boulevard Raspail, Paris,

France. Professor J.-P. Fitoussi, Universite Louis Pasteur, Strasbourg, France. Mr L. Frey, University of Parma, Italy. M. J.-L. Gaffard, Universite Louis Pasteur, Strasbourg, France. Professor N. Georgescu-Roegen, Universite Louis Pasteur, Strasbourg, France. Professor Dr H. Giersch (Treasurer, lEA), Institut fiir Weltwirtschaft, Kiel,

FRG. Dr Margaret S. Gordon, Carnegie Council on Policy Studies in Higher

Education, Berkeley, California, USA. Professor X. Greffe, Faculte des Sciences Economiques, Villetaneuse, France. Professor E. Grinols, Cornell University, USA. Professor D. Hague (Rapporteur), Manchester Business School, UK. Professor P.-Y. Henin, University of Paris, France. Professor A. G. Hines, Birkbeck College, University of London, UK. Professor C. C. Holt, The University of Texas at Austin, USA. ProfessorS. Honkapohja, Ytj~ Jahnsson Foundation, Helsinki, Finland. Professor Lord Kaldor, King's College, Cambridge, UK. Mr M. Kaser, St Antony's College, Oxford, UK. Professor R. T. Kaufman, Amherst College, USA. ProfessorS. Khachaturov, Association of Soviet Economic Scientific

Institutions, Moscow, USSR. Professor Th. van de Klundert, Katholieke Hogeschool, Tilburg, Netherlands. Mr. C Koellreuter, European Centre for Applied Economic Research, Basel,

Switzerland. Professor S. Kolm, Paris, France. Professor A. Lukaszewicz, Polish Economic Society, Warsaw, Poland. Professor P. Maillet, Lille, France. Professor E. Malinvaud, Paris, France. Professor F. Modigliani {Vice-President, lEA), Sloan School of Management,

MIT, Cambridge, USA.

List of Participants

Professor K. Odaka, Hitotsubashi University, Japan. Professor H. M. A. Onitiri, Nigerian Institute of Social and Economic

Research, lbadan, Nigeria. Professor M. Parkin, University of Western Ontario, London, Canada. Professor J. J. Paunio, University of Helsinki, Finland. Professor Pollin, Universite Louis Pasteur, Strasbourg, France.

ix

Professor G. Rehn, Swedish Institute for Social Research, Stockholm, Sweden. M. M. Richonnier, CEE, Brussels, Belgium. Professor Sir Austin Robinson (lEA General Editor), The Marshall Library,

Cambridge, UK. M. R. Salais, Chef de Ia Division Salaires, INSEE, Paris, France. Professor B. SBdersten, Nationalekonomiska lnstitutionen, Lund, Sweden. Professor E. Thorbecke, Cornell University, Ithaca, USA. Professor T. Timofeev, Institute for International Labour Movement,

Academy of Sciences, Moscow, USSR. ProfessorS. Tsuru (President, lEA), The Asahi Shimbun, Tokyo, Japan. Professor D. Vitry, Universite Louis Pasteur, Strasbourg, France.

Interpreters

M. A. Naudeau, Boulogne/Billancourt, France. Mrs Janine Yates, Geneva, Switzerland.

Secretariat

Miss Mary Crook, Administrative Secretary, lEA. Mrs Elizabeth Majid, Assistant, lEA. Mrs Brenda Hague, Wilmslow, UK.

Introduction

E. Malinvaud and J.-P. Fitoussi

Economists of western countries are faced with the pressing problem of unemployment. How could a conference of the International Economic Association help them better to take on the challenging task that confronts them in this respect? What contribution can these proceedings make? Answers have to remain modest and readers should not hope to fmd recipes with immediate practical usefulness in this volume.

People expect of economists that they should prepare more adequate government decisions and indeed this is probably the main duty of our profession. Moreover, since economic situations within various countries are largely interdependent, concerted action at the international level seems to be called for. But a scientific organisation can only have a very indirect impact on policies and fortunately many international meetings deal with unemployment problems from the intergovernmental point of view.

The conference that met in Bischenberg was therefore intended to stimulate mutual understanding between research workers and mainly concerned with the theoretical analysis of unemployment. The purpose was to identify the issues correctly, to confront and evaluate alternative approaches, to suggest new questions to be considered and to elucidate the exact domain of validity of various analytical tools.

The conference also wanted to propose a better understanding between labour economists and those general economists who pay special attention to unemployment. Preconditions for an improved understanding are met since each of the two groups feels it needs collaboration from the other one: labour economists know that explaining the level of unemployment requires consideration of the full macroeconomic set up; general economists know that unemployment has very important structural aspects requiring specific studies and that the actual working of the labour market is not well described in available general theories.

The organisation of this book reflects the purpose of the conference. Its two major parts respectively concern on the one hand the macroeconomic analysis to which general economists devote most of their attention, on the other hand the analysis of the labour market, which is the main field of interest of labour economists. But two shorter parts initiate the subsequent developments. The first one intends to pose the problems in the precise context that western countries now experience. The second one concerns the

xii Introduction

crucial issue of the interdependence between unemployment and international trade policy.

The conference was not intended to provide a complete description of current unemployment, nor to concentrate on the identification of its causes, nor to elaborate a programme for curing it. Participants were, of course, well informed of the prevailing situation, even if, as it appears in particular in the report of the discussions, they often differed somewhat as to their views concerning what was fundamentally new about it. However, three papers of a rather general nature and directly concerned with the current situation were considered as a background material and make up the first part of these proceedings.

Studying unemployment in North America, Western Europe and Japan, R. T. Kaufman first shows that changes in the demographic structure of the labour force can only explain at most a very small part of the recent surge, which is largely due to an increasing gap between potential and actual output. His analysis also shows that unemployment rates are more sensitive in America than elsewhere to macroeconomic disturbances, which implies that the firm's manpower policies significantly vary from one region to another.

T. Timofeev presents a survey of the unemployment problem in western countries and in Eastern Europe. He not only reviews the broad lines of argument used by theorists but also looks at the positions taken by trades unions, by politicians and by various international conferences. Concerning the scientific management of the labour force in socialist countries, he discusses some of the challenges it had to face.

Starting from the view that unemployment is going to be a long-term phenomenon, L. Emmerij dismisses as ineffective the conventional economic instruments of either private demand management or profit restoration. Although a worldwide Marshall Plan and the development of local public services could contribute somewhat to the solution of the present problem, he believes that new legislation that would reduce the labour supply is also required. He presents a definite proposal to this effect.

Among the policy measures that are considered for curing unemployment, those restricting international trade are particularly debated. Indeed, whereas many cases are known at the microeconomic level in which foreign compet-ition is responsible for unemployment, the question arises whether international trade as a whole is a factor in aggregate unemployment. To this question the two papers of the second part are devoted.

N. Kaldor starts from a critique of the abstract theory of international trade. rle thinks this theory overlooked that in some cases free trade will create unemployment and make the world worse off than it would be under some system of regulated trade. He finds reasons in economic history for believing this case to be significant. Unemployment effects are seen as particularly noteworthy in trade between manufacturing countries, sensitive as it is to economies of scale, polarisation processes and the resultant trade imbalance.

Introduction xiii

E. Grinols and E. Thorbecke use input-output techniques to examine the related but distinct question as to whether trade between the US and the developing countries has caused the US employment situation to deteriorate. A rigorous answer is difficult to get, as usual when one somehow ccmpares an actual evolution with what might have been otherwise. But a careful discussion suggests that the net overall effect between 1962 and 1975 was small and that, if anything, it was rather favourable to American employment.

Macroeconomic analysis, which is the subject of the third part, is here mainly approached from the theoretical side, but the last of the five papers deals with an application to the study of trends and policies in one country. The first two are concerned with how analysis of unemployment can benefit from the theory of general equilibrium under sticky prices and rationing.

A. G. Hines scrutinises the notion of involuntary unemployment and argues that it can make sense only at the macro level. Indeed, according to him, that unemployment is involuntary which can only be cured by an expansion of aggregate demand by accepting that lower-wage labour would not get rid of this unemployment, which then does not depend on labour's actions. He then studies the consequences that the behaviour of prices and money wages may have, depending on the type of situation that prevails.

The main focus of the paper by E. Malinvaud is to discuss, from two points of view, the relevance of the concept of classical unemployment. When a disaggregated representation of production is considered, such unemployment may be recognised in some sectors and its occurrence significantly reduces the multiplier. A heuristic discussion of the dynamics of price and wage adjust-ments under classical unemployment also suggests that the latter may not vanish as quickly as one might have thought.

J.-P. Fitoussi and N. Georgescu-Roegen want first to point out that post-war technological progress has an important role in explaining present unemployment, which often appears as structural. Large changes in the structures of the productive sector have been required. The authors then analyse why asymmetries in agents' behaviour prevent quick adaptations to these changes.

No complete treatment of unemployment can ignore inflation. M. Parkin surveys the present state of knowledge about the so-called trade-off. He considers, systematically and often critically, the theoretical research of the past ten years and shows that it raises a number of puzzles to be clarified by empirical work. He sees no justification for activism in demand management or incomes policies but wonders whether the institutions ruling the money supply should not be reformed.

Two econometric models of Western Germany are used by C. Koellreuter who discusses in particular their representation of the demand for labour and the employment elasticities with respect to output and wages. Ex post analysis of the 1974-75 recession is followed by the examination of various scenarios for 1978-80, these being intended to help in the choice of a macroeconomic policy.

xiv Introduction

The fourth part of these proceedings begins with the observation that in a segmented labour market the unemployment rate is high where high wages are paid, so that a low 'job availability' compensates for the attraction of good wages. C. Holt presents a theoretical model for the phenomenon and argues that, when allocation is made by job availability as well as by wages, the market has a full spectrum of equilibria, which brings a new light on the rationale for, and nature of, the Phillips relation.

Dealing with employment discrimination in the US, B. Bergmann surveys a number of theoretical explanations. She then builds and applies a simulation model in which various race-sex groups are characterised by distinct transition probabilities as between different states with respect to employment or activity. The discrepancies between these probabilities provide measures of the segmentation of the labour market. The model shows what can be expected from actions that would remove some of these discrepancies.

B. Sodersten scr].Jtinises two major evolutions affecting the labour supply: the increasing participation of women and the trend towards new forms of organisation of work. He sees the first one as being partially explained by the modern theory of the household but also as due to the feedback of some other social changes. The appearance of new types of organisation within firms is a response to a new attitude of employees, who put higher weight than before on work satisfaction.

L. Frey argues along somewhat different lines. He considers that income inequality is a major factor explaining the present high labour supply. Due to the demonstration effect, strong incentives exist within families for high consumption spending, which leads to an increase of female participation in the labour force. Hence a policy aiming at income equalisation would make a significant contribution to the cure of unemployment.

The remarkably low level of unemployment in Japan and its lack of sensitivity to business fluctuations have often been related to special features of manpower management in that country. It is therefore fitting that K. Odaka provides a careful account of the working of the Japanese labour market. It turns out that flexibility exists both in the supply of and in the demand for labour.

This brief summary of the purpose of each of the fifteen papers leaves no room for the discussion of the ideas and results that were proposed. But the discussion was lively, as the reader will see from the reports presented in this book, reports that of course defy abridgement.