MODELS MeetingSeminar on Labor Market Modeling

Brussels 10/11th September 2007CRSA/ERASMENEMESIS Model

PLAN

1. Human Capital Integration in Production Block

2. Labor Market

3. Interactions on Income, Savings and Consumption

1.1 The technical progress in NEMESIS1.1.1 From R&D to Knowledge stock1.1.2 Process and Product innovation

1.2 Overview1.2.1 Neoclassical Framework1.2.2 Endogenous growth theory1.2.3 Substitution and Complementarity problems between

Human Capital and R&D1.2.4 “Technological Frontier” approach1.2.5 Empirical studies

Human Capital Integration in Production Block (1/2)

Human Capital Integration in Production Block (2/2)

1.3 Human Capital Integration in NEMESIS production block1.3.1 First Empirical Results

1.3.2 Graphical Analysis

1.3.3 Specification Hypothesis

1.3.4 New Production Function

1.1 The Technical Progress in NEMESIS

Two types of innovations– Process– Product (quality)

Endogenous technical progress– Learning– R&D

Knowledge externalities (Knowledge spillovers)– Inter-sectoral– Inter-national

1.1.1 From R&D to Knowledge Stock

R&D StockR&D Expenditures Decay

KNOW

Foreign Public R&D StockR&D Stocks of Foreign

SectorsPublic R&D Stock

R&D Stock of Other Sectors

R&D Stock of the Sector

Technology Flow MatricesTechnology Flows

Matrices

1.1.2 Process and Product Innovation

Supply

Demand

Productivity Growth Increase of supply

Process InnovationPrice Decrease

volume/price elasticity of

the demand ε

Increase of the demand

Supply

Demand

Product Innovation (Quality)

Increase of efficiency by volume unit

Decrease of the efficiency unit price

Variation of volume demand

Increase of efficiency unit demand

1.2.1 Neoclassical Framework (1/2)

Macro-Mincer Equation

Where Yt is the mean of revenues; St is the average

years of schooling.

ttt SLnY 10

1.2.1 Neoclassical Framework (1/2)

Mankiw, Romer, Weil (1992)

Where K corresponds to the physical capital, H is the human capital stock

Assumptions: - Diminishing returns to scale,

- Perfect substitution between skilled and unskilled labor,

- Human capital and labor are considered separately.

1)(ELHKY

1.2.2 Endogenous Growth (1/2)

Lucas (1988): Education and professional training

- H is the human capital;

- is the average stock of human capital;

- u is time devoted to production.

H

HuHKY 1)(

1.2.2 Endogenous Growth (2/2)

Assumption underlying the theory:

- No diminishing returns, - The presence of externalities induces a need for

education policies,

- Substitution/complementarity problems,

- No distinction between levels of educational attainment (primary, secondary or tertiary).

1.2.3 Substitution and Complementarity Problems between Human Capital and R&D

Nelson and Phelps (1966): - The human capital stock determines the ability to assimilate new

technologies. Benhabib and Spiegel (1994): - Their empirical study emphasizes this phenomenon. Golsbee (1998), Romer (2000), Acemoglu and

Zilibotti (2002): - More education leads to more investment in R&D. - The more R&D and innovation, the stronger is the demand for

education.

1.2.4 “Technological Frontier” Approach

The source of technological progress is dual, it results from: - Innovation and imitation activities. Far from the technological frontier, the potential for catching up is

very large and so imitation contributes significantly to technological improvement.

Close to the frontier, the potential for catching up is very small, innovation and tertiary education are needed for technological progress.

There is a proximity threshold above which tertiary education has a growth-enhancing effect. (Vandenbussche, Aghion, Meghir 2004).

1.2.5 Empirical Studies (1/2)

Non structural econometric methods:

- Barro and Sala-i-Martin (1995):

- Three levels of education: primary, secondary, tertiary.

- Distinction by gender.

- An increase by 0.091 year of the male tertiary education raises the economic growth by 0.5%.

1.2.5 Empirical Studies (2/2)

Structural approach: - Benhabib and Spiegel (1994): - An increase of the stock of human capital by 1%

increases the growth rate by 0.13%.

- Bassanini and Scarpetta (2001): - One more year of schooling raises the level of

GDP per capita by 6%.

1.3.1 First Empirical Results (1/2)

ERASME (2007):

- The panel dataset covers 44 countries between 1960 and 2000.- We run regressions of the total factor productivity (TFP)

growth on the stock of skilled human capital and on the proximity to the frontier.

- The stock of skilled human capital is assumed to be the skilled fraction of the labor force;

- Proximity is measured by the ratio between the TFP in the country and the corresponding variable in the USA.

1.3.1 First Empirical Results (2/2)

DATASET: We present results using two education datasets, those of

Barro and Lee (2001) and Cohen and Soto (2001).

EMPIRICAL RESULTS: - The stock of skilled human capital has a positive and

significant impact on the TFP growth in emerging countries.

- Moreover, this impact is stronger for emerging countries than for OECD economies which are closer to the frontier.

1.3.2 Graphical Analysis (1/4)

Curve derived from the V.A.M. (2004) estimations:

1.3.2 Graphical Analysis (2/4)

Where:

- dg/dLs is the marginal impact of the stock of skilled (Ls) on the TFP growth (g),

- a is the proximity to the frontier,

- a* is the proximity threshold above which the skilled human has a growth-enhancing effect.

1.3.2 Graphical Analysis (3/4)

Curve derived from ERASME (2007) estimations:

1.3.2 Graphical Analysis (4/4)

Where: - from a* to a**, the marginal impact of the stock

of skilled human capital on TFP growth is increasing,

- a** is the threshold above which dg/dLs decreases,

- remark: we do not have sufficient data to estimate this relationship for countries below a*.

1.3.3 Specifications Hypothesis

Incorporation of the variable KNOW that is linked to R&D stocks and to spillovers.

Separability between production factors. - Fallon and Layard (1975). - Krussell and al. (2000) - Papageorgiou and Saam (2006) Complementarity between skilled labor (Ls) and

technological capital (K, KNOW)

1.3.4 New Production Function in NEMESIS (1/2)

New Production Block :

ttt XKNOWAY ..

1.3.4 New Production Function in NEMESIS (2/2)

Old Specification New Specification

X

M KEL

KEL

K E

X

Lu

KELuLsM

KELs

KELs

K E

2. Labor Market

2.1 Backgrounds

2.2 Specifications

2.3 Labor Force

2.4 Supply of Skills

2.1 Backgrounds

In NEMESIS, we use a wage/price setting framework involving a modified Phillips curve and a price setting equation in level

2.2 Specifications (1/2)

An illustration of WS/PS model can be deduced from bargaining models which imply that wages are fixed as a ‘mark-up’ over a reservation wage:

W/P = (W/P)R + Fs + Ts- a.U

Where, (W/P)R: the reservation wage, Fs: the tax wedge, Ts: the trade union density and U: the unemployment rate

2.2 Specifications (2/2)

The problem is the determination of the reservation wage.

Four approaches exist in the literature:1. Introduction of a positive trend

2. Unemployment benefits

3. Labor Productivity

4. Lagged real wages (approach kept)

2.3 Labor Force (1/3)

12 different labor force cohorts differenced by:

- Age : [15,24]; [25,64] and 65 and over,

- Gender: men and women,

- Qualification: skilled and unskilled.

2.3 Labor Force (2/3)

Labor force by cohorts:

• i : country index, x: cohort index and t: time index

• LF : the labor force, T: the participation rate and POP: the population which is exogenous but have structural impacts on labor force.

2.3 Labor Force (3/3)

• bmin and bmax are respectively the limits for participation rates,

• And Xi,x,t are factors which impacts on choice to participate on labor market or not (trend, real wage, employment variation, social transfers, population structure, enrolment in studies, …)

• Participation rate modeled through a logistic curve for each cohorts :

2.4 Supply of Skills

Grounded on public and private expenditures on education, and expenditures on training

Influenced by expectations of skill needs over future years, extrapolations of past trends, population projection by cohorts

3 Interactions on Income and Savings

3.1 Current state of the model

3.2 Current developments

3.1 Current State of the Model (1/4)

In the current version of NEMESIS, disposable income and savings are derived from the households’ agent account

No data available for splitting the full sequence

Assumptions – Wages and salaries are available (EU-KLEMS)– Mean net income by education level (Eurostat)– When information, applying different taxation rates,

calculating capital income… When not, same rates for both categories

3.1 Current State of the Model (2/4)

Aggregate consumption depends of– Real disposable income– Population structure– Interest rates– Inflationary pressure

Aggregate consumption is then split between the 27 consumption categories using the following structure

3.1 Current State of the model (3/4)

Durable Goods

Clothing and Footwear

Furniture and Household Equipment

Transport

Furniture

Textiles

Major Appliances

Household Utensils

Household Operation

Domestic Services

Personal Transport Equipment

Operation of Personal Transport Equipment

Purchased Transport

Transport by Rail

Transport by Bus, Coach and Tram

Other Transport

PetrolDieselOil

3.1 Current State of the Model (4/4)

Food, Beverages and Tobacco

Gross Rent and Water Charges

Fuel and Power

Medical Care and Health Expenses

Communication

Recreation

Equipment and Accessoires including Repairs

Other Goods and Services

Expenditure in Restaurants, Cafés and Hotels

Coal

Gas

Petroleum Products

Power

Food

Beverages

Tobacco

Luxuries

Necessities

Non-durable goods

3.2 Current Developments (1/2)

No data for consumption by educational level but:– By socio-economic category (EU15)– By income quintile (EU15) (our choice)

We can then split the consumption functions into two categories (Calibration) for the EU15

still searching data for other countries

3.2 Current Developments (2/2)

4 accounts are distinguished in the model (NFC,FC,GGOV,HH)

Public budget already linked in the model– Expenditures : some are exogenous (final

consumption), others are partially of fully modelled (subsidies, Compensation of employees..)

– Incomes fully endogeneised (taxes, …)