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Area Conference on Employment and Social Protection
11-12 May 2001, CESifo Conference Centre, Munich

The first annual CESifo Area Conference on Employment and Social Protection took place in Munich on 29-30 June 2001. The main purpose of the conference was to bring together CESifo Fellows working in this area to discuss their most recent research and to intensify network contacts. The conference was a great success. Sixteen highly interesting papers were presented, accompanied by very lively discussions between the 24 participants. The inspiring atmosphere of the new CESifo Conference Centre enhanced all of this.

After a welcoming address by CESifo President Hans-Werner Sinn, Lawrence Kahn

opened the conference by raising the question (in a joint paper with Francine Blau) as to whether cognitive test scores can explain higher wage inequality. Using micro data for several countries, he showed that labour market prices on average are quantitatively more important than differences in the distribution of test scores. Josef Falkinger
(with Volker Grossmann) presented a theoretical reason for an increase in wage inequality between low- and highly-skilled workers. The primary economy requires high skilled labour. Because of increased competition or new methods of production, firms improve their skill structure by cutting down on jobs for low skilled workers thus raising the pressure on the secondary labour market.

The paper by Bertil Holmlund

(with Per Engström and Ann-Sofie Kolm) investigated optimal tax rules in search equilibrium with home production of services. They found that in the style of the well-known Corlett Hague rule tax differentiation, with lower taxes on services, is welfare improving and reduces unemployment. Giorgio Brunello
asked (with Claudio Lupi, Patrizia Ordine, and Maria Laura Parisi) whether the relationship between labour taxes and unemployment varies across Italian regions. In spite of similar national labour market institutions, he showed that the relationship between unemployment and taxes is much stronger in the North than in the less developed South.

Alessandro Cigno

(with Furio Rosati) examined causes and consequences of child labour in India. They found that beneficially reducing child labour requires a change in the economic and social environment by reducing the cost of attending school and by improving public health. Stephen Klasen
's stimulating paper (with Ingrid Woolard) focused on unemployment and household formation in South Africa. He showed that rural unemployment remained high, despite a "flexible" labour market. His results also suggest that the absence of unemployment insurance gives the unemployed very strong incentives to rely on insurance via relatives, with potentially harmful consequences for geographical mobility.

Armin Falk

showed experimentally (with Martin Brown and Ernst Fehr) that contractual incompleteness causes a fundamental change in the nature of market interactions. If contracts are incomplete, the large majority of trades are initiated by private offers, most of which are immediately accepted. It turns out that the threat of terminating the relations turns out to be a very powerful disciplining device. Volker Meier
investigated other incentive mechanisms. He found that a promotion system guaranteeing a permanent salary increase induces a higher output than a premium system, which allows for a reduction in future incomes.

Torben Andersen

began the second day of the conference by asking whether there is a race to the bottom in social standards due to increasing product market integration. In a quite clean analytical model, where trade is driven by comparative advantages, he showed that there will be a downward bias in employment and social standards relative to a scenario where trading countries co-operate. Thomas Moutos
presented a paper (with William Scarth) on "The unemployment consequences of unbiased technological change". He argued that uniform (Hick's neutral) technological progress will increase unskilled unemployment in a two-sector model, where one of the sectors produce high quality varieties using more skill intensive methods.

Louis Christofides

studied (with Thanasis Stengos) the wage-change distributions in union contracts in Canada within the period 1976-1999. Using non-parametric tests he showed convincing evidence of substantial nominal wage rigidity during low inflation periods. In joint work with Hassan Molana, Jim Malley
analysed the effects of demand shocks in a model of monopolistic competition and efficiency wage setting. He showed that unemployment and output are positively related when unemployment is low and inversely related when unemployment is high.

"The effect on employment protection on worker effort" was the theme of the paper Andrea Ichino

(with Regina Riphahn). Using a rich data set from a major Italian bank, he showed that the absenteeism rate triplicates for males once employment protection is granted. Based on this empirical finding he discussed and estimated by how much the absenteeism rate would change if Italian employment protection was eliminated. Margarita Katsimi
argued that firm-specific training has two opposite effects on wages: on the one hand, workers must be compensated for the higher level of effort due to training. On the other hand, the wage can be lower, since trained workers face a lower probability of getting the sack in a recession. Furthermore, the second effect enhances investment in risky firm-specific human capital.

In a paper written with Rafael Lalive, Josef Zweimüller

raised the question as to how maximum unemployment benefit duration affects the transition rate to jobs. Since Austrian unemployment insurance has changed repeatedly during the last decade his microeconomic data set offers a unique opportunity to study these issues. His main results were that, firstly, an extended entitlement in Austria reduced the transition rate by between 33 to 40 percent and, secondly, the marginal effect of a longer benefit duration decreases strongly with the size of the benefit extension. Finally, Rainer Fehn
(with Ansgar Belke) argued that labour market rigidities alone do not provide a satisfactory explanation of why some OECD-countries have been more successful in enhancing employment. He focused on financial constraints and a lack of venture capital as being important obstacles in creating new firms and jobs, especially in the "new economy".

The conference ended with a panel discussion on the direction of future research on unemployment. The panellists Torben Andersen, Nils Gottfries, Andrea Ichino and Lawrence Kahn outlined the most important topics in this area, from the perspective of the macroeconomist (Andersen and Gottfries) and the labour economist (Ichino and Kahn). The discussion led to lively interactions - including many comments from the audience - on the pros and cons of empirical work versus theory, aggregate analysis vs. microeconomics, the virtues of natural experiments, etc. At the close of the conference, the CESifo area co-ordinator Jonas Agell thanked all participants for their contributions, and the CESifo office for an excellent and highly efficient organisation. As a result of the nice Munich environment of the present conference, it was decided that the 2002 family-meeting on "Employment and social protection" will also take place in June.

Jonas Agell

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