-
Log[u - us +
]
Crowding out
A crucial topic is crowding out on the labour market. Highly productive labour can replace lowly productive labour more easily than conversely, and this has effect on wage claims. This might be something like a continuous version of the insider-outsider theory.
Unemployment among the higher skilled is not large. The analysis here is that this is caused by crowding out on the labour market. When potentially higher productive people face the choice between unemployment and a comparatively lower paid job, they choose the latter (noteably when they are tired of waiting or when the benefit runs out). They thereby “take the places” of others - who repeat the process to others below. The initial set-back in pay level tends to translate into demand for pay rises. Who crowds out, has a stake in trying for pay rises. A lot of crowding out will cause a mood for inflation. Who have been crowded out towards unemployment, have some incentive not to inflate, but have little countervaling power against the general mood for inflation.
Figure 23 already presented the stylized fact for labour demand and supply, i.e. that vacancies tend to occur at higher income and unemployment at lower income. [92]
There is a meaningful aggregation of vacancies and unemployment by subcategory of low and high productivity workers, giving Vl, Vh, Ul and Uh. When vacancies are asymmetrically relevant only for the higher incomes (V ~ Vh, Vl ~ 0), and when there are always vacancies for higher incomes due to crowding out (Vh >> 0), then V is not that important. However, V may become important again when Vl is made nonzero by proper tax policies. If low productivity labour has a stronger position in the labour market, then the risk of unemployment is spread more evenly, and trend-setting high productivity labour will be cautious about wage claims. High values of Vl and Uh, i.e. vacancies for the low productivity group and unemployment for the highly productive group, have the largest wage checking effect. High Vl and Uh make it difficult for the trend setting higher productive workers to shift the risk of unemployment to the lesser productive workers. We will not formally develop this point.