Abstract

     Despite the unambiguous predictions of the canonical model of a competitive labor market, empirical studies of the labor market effects of payroll taxation provide conflicting evidence. We estimate the labor market impacts of payroll taxation in Singapore, the country with the most competitive and flexible labor market among the countries investigated in the literature. By exploiting the sharp reduction in payroll tax rate when workers turn 60, we find that the reduced payroll tax rate in Singapore has a large effect on wages without changes in employment. Our meta-analysis shows consistent evidence that varying degrees of labor market competitiveness across places and time could explain the mixed results in the literature. Our findings corroborate the prediction of the canonical model that the welfare costs of social insurance programs financed by payroll taxes can be small in a competitive labor market.

Introduction

     Most social insurance programs, such as old-age pension and health, disability, and unemployment insurance, are financed by payroll taxes (or social security contributions). These payroll taxes often account for more than 30% of workers’ labor income and about a quarter of the total tax revenue of OECD member countries (Saez et al., 2019). Although social insurance programs play an important role in improving social welfare, the payroll taxes levied to finance those programs can distort the labor market.

     In the canonical model of a competitive labor market, workers have an incentive to increase (decrease) their labor supply depending on how they value their social insurance benefits when the payroll tax rate increases (decreases). Thus, employers’ additional labor costs due to higher payroll taxes can be shifted to workers through reduced wage payments. If workers regard the payroll taxes borne by their employers as their social insurance benefits, the incidence of payroll taxes will fall solely on workers’ wages. This leaves employment or work hours unchanged, thereby minimizing deadweight loss in the labor market (Summers, 1989).

     Several empirical studies have tested Summers’ (1989) insights into the labor market impacts of payroll taxes to finance worker benefits across various countries and time periods and found mixed results. One possible explanation to reconcile the mixed findings in the literature is discrepancies in labor market institutions between the real world and the theoretical model. Although the canonical payroll tax incidence model assumes a perfectly competitive labor market, competitiveness in an actual labor market varies across countries, demographic groups, and time periods.

Conclusion

     Despite clear predictions under the canonical model of a competitive labor market, existing empirical studies have provided mixed evidence on how much a payroll tax change is shifted to workers’ wages. One possible explanation for this discrepancy is the heterogeneity in labor market flexibility across countries and time. To better understand the role of market flexibility or competitiveness, we investigate the labor market impact of payroll taxation in Singapore, where the labor market is considered more competitive and flexible than in any other country investigated in the literature. We document that saved labor costs via the reduced payroll tax rate largely shifts to workers’ wages. The estimated pass-through rate in Singapore is 77.5%, which is similar to the weighted average pass-through rate of the studied countries where wage bargaining predominantly takes place at the local or firm level, as in Singapore. These findings indicate that labor market competitiveness can play a significant role in determining the labor market impact of payroll taxation. A policy implication is that labor market distortion due to payroll taxation would be small when the labor market is competitive.

This article examines how final product trade with China shapes and interacts with labor market imperfections that create market power in labor markets and prevent an efficient market outcome. I develop a framework for measuring such labor market power distortions in monetary terms and document large degrees of these distortions in Germany’s manufacturing sector. Import competition only exerts labor market disciplining effects if firms, rather than employees, possess labor market power. Otherwise, increasing export demand and import competition both fortify existing distortions, which decreases labor market efficiency. This widens the gap between potential and realized output and thus diminishes classical gains from trade.

Introduction

The rapid and ongoing process of globalization creates profound challenges for firms operating in the market economy. Global integration has increased the size of firms’ product markets and the amount of their competitors, while global production networks and dramatically falling transportation costs redefine the nature of production activities. How firms respond to these new market conditions has fundamental implications for domestic workers, productivity levels, and living standards.Traditionally, most research studying firm responses to trade exposure relies on perfectly functioning labor markets. By design, this limits the analyses to scenarios where wages are always on competitive levels and where firms do fully pass gains and losses from trade exposure through to labor expenditure adjustments. Recent work, however, has raised awareness to the role of imperfect functioning labor markets for understanding firms’ responses to trade exposure: By affecting how firms adjust to changes in product and input market conditions, labor market imperfections may alter distributional outcomes from trade and may change aggregate trade gains compared to a baseline scenario with competitive labor markets (e.g. Egger and Kreickemeier, 2009; Kambourov, 2009; Dix-Carneiro, 2014). Therefore, understanding how international trade interacts with labor market imperfections has a first order priority in evaluating welfare effects and distributional impacts from trade.

Abstract

In this paper we examine the macroeconomic information content of aggregate earnings from the labor market’s perspective. We use insights from the labor economics literature to characterize the information contained in aggregate GAAP earnings and its components that is relevant for predicting aggregate job creation and destruction, labor income, and unemployment. Our results suggest that not only does aggregate earnings news convey information about future labor market aggregates, but its information content is incremental to other macroeconomic variables at near-term horizons. Further, the source of this information stems primarily from two earnings components: aggregate core earnings and special items. Core earnings news signals persistent changes in economy-wide profitability that anticipate aggregate job creation and destruction up to four quarters ahead, while special items contain news only about job destruction at horizons of up to two quarters. Taken together, our results suggest that aggregate GAAP earnings contain useful information about future labor market conditions, with the nature of such information varying across earnings components.

Introduction

Prior research finds that aggregate GAAP earnings predict future GDP growth and attributes this finding to a “corporate profit” channel, whereby aggregate earnings predict the corporate profit component of future Gross Domestic Income (GDI), the income-based equivalent of GDP (e.g., Konchitchki and Patatoukas 2014a). Corporate profits, however, represent only a small portion of GDI (on average about 9% over the past 10 years). Thus, if aggregate earnings convey macroeconomic information primarily through corporate profits, the role of accounting information for gauging the health of the macroeconomy is limited. Such a view is inconsistent with recent evidence that aggregate earnings news conveys important information about future inflation and monetary policy (Gallo et al. 2016; Shivakumar and Urcan 2017). In this paper, we focus on another aspect of the macroeconomic information contained in GAAP earnings—the link between aggregate GAAP earnings and the labor market.

The purpose of this note is to study a connection between a model of labor markets with regulation recently defined and analyzed in Fu et al. (2017) and a model of simultaneous single-item auctions which was originally suggested by Bikhchandani (1999) and which has received significant attention in the last few years in the computer science literature on algorithmic game theory. This connection yields new results in both models. In particular, the results of Fu et al. (2017) on labor markets with regulation imply (via the connection we establish here) new bounds on the price of anarchy and the price of stability of simultaneous second price auctions as well as new guarantees on the existence of pure Nash equilibria in this auction game. In the classical labor market model due to Kelso and Crawford (1982) there is a set of firms N, a set of workers M, and a production function v n : 2 M → ℜ+ for every firm n ∈ N, where v n (S) is the production value of firm n if it hires a subset workers S ∈ 2 M . Three main results of this theory are that gross-substitutability of all production functions is a sufficient condition for the existence of a stable matching of workers and firms, that all stable matchings are efficient, and that in fact gross-substitutability is also a necessary condition for the above two properties to hold (this last property is due to Gul and Stacchetti (1999)). Bikhchandani (1999) studies a complete-information auction game where firms compete simultaneously for employees by proposing salaries, and employees pursue the highest offer. This is known in the literature on combinatorial auctions as a First Price Item Bidding (FPIB) auction. Bikhchandani (1999) shows a connection between this auction game and the classic labor market model described above, by showing a correspondence between the set of Nash equilibrium (NE) outcomes of the FPIB game and the set of stable outcomes of a labor market.3 In a recent paper (Fu et al., 2017) we modify the classic labor market model and study labor markets with regulation designed to provide employees with job security. To capture job security we have introduced a weaker solution concept termed JS-stability (where JS stands for job security). That previous paper has three main results: it provides sufficient conditions on the structure of the production functions that ensure the existence of JS-stability, it shows that the welfare in any JS-stable outcome is at least half of the optimal welfare, and it describes necessary and sufficient conditions for the existence of efficient JS-stable outcomes. These results therefore provide a mirror image of the three main results of classic labor markets (without job security) described above. Continuing this thread of thought, our result in this current note parallels the connection between the classic labor market and the FPIB game of Bikhchandani (1999). Specifically, we show a connection between labor markets with job security and the Second Price Item Bidding (SPIB) auction game, introduced in Christodoulou et al. (2008). The difference between FPIB and SPIB is that in the latter an employee’s salary is determined by the second highest offer and not the first. While Bikhchandani (1999) shows a correspondence between the set of pure NE outcomes of the FPIB auction game and the set of stable matchings of the classic labor market (without regulation), we show here a correspondence between the set of pure NE outcomes of the SPIB auction game and the set of JS-stable outcomes in our model of labor markets with regulation. The two theories of labor markets with and without job security are therefore parallel with respect to this property as well. As mentioned above, as an immediate corollary of this connection we obtain several results regarding existence of pure Nash equilibria in the SPIB auction game, and the price of anarchy and price of stability in this game. Section 2 gives more details on the model of a labor market with regulation. Section 3 analyzes the connection between the labor market model and the auction model, and describes some corollaries that this connection yields.

In this study we present an extension of a key macro-finance model which links endogenous growth theory to asset pricing. The leading literature in this field either accounts for endogenous capital accumulation or endogenous labor supply, but not for both. In the economy of Kung and Schmid (2015), which we use as a benchmark, labor supply is inelastic (i.e. fixed). On the other hand, Croce et al. (2013) do not utilize physical capital as a production factor.2,3 We bridge this gap by adding endogenous labor supply and wage rigidities to the Kung and Schmid (2015) model (hereinafter ‘KS’). Labor market dynamics have been shown to be an important driver of business cycles. Particularly, both empirical and theoretical studies emphasize the importance of wage rigidities in explaining labor growth volatility, wage dynamics, and asset prices (Campbell and Kamlani, 1997; Agell and Lundborg, 2003; Hall, 2005; Blanchard and Galí, 2007; Merz and Yashiv, 2007; Smets and Wouters, 2007; Uhlig, 2007; Belo et al., 2014; Favilukis and Lin, 2016). In this respect, our work is closely related to Favilukis and Lin (2016) who introduce sticky wages into a production economy in order to explain several features of financial data. In their setting, the introduction of wage rigidities makes wages less pro-cyclical, profits more volatile and dividends highly pro-cyclical. If coupled with several other frictions and shocks, the model produces relatively smooth wages, a high equity premium, and it can account for 75% of the equity return volatility. However, similarly to KS, labor supply decisions are not endogenized.

Does trade really reduce unemployment? The empirical analysis in Treffler (2004) highlights ambiguous effects in the short and long run of the US–Canada free trade agreement. In line with public sentiments against globalization, he documents employment losses shortly after the establishment of the agreement. Those negative employment effects stand in stark contrast to the positive long-run effects documented in the same study, as well as most of the more recent analyses in this field. Models with heterogeneous firms and search frictions give rise to a channel in the Melitz (2003) model through which trade liberalization fosters firm selection but reduces unemployment in the long-run. Felbermayr et al. (2011) show that more productive firms are relatively less efficient in recruiting workers, so that the net-effect on job-creation is positive. Helpman et al. (2008, 2010) show that the results may also be negative depending on the model setup. The crucial assumptions in those theoretical approaches, however, are an exogenous job-separation rate and no channel for job-to-job transitions, which is likely to mask important adjustment processes in the labor market after trade liberalization. Recent contributions aim to overcome this shortcoming, albeit they focus on introducing on-the-job search into theoretical trade models (see, e.g., Larch and Holzner, 2011; Suverato, 2013). We contribute to the literature by empirically analyzing the impact of trade on labor market dynamics. Our approach goes beyond the established literature as we identify both the short- and longrun effects within a structural VAR approach.

Recent evidence suggests that real estate collateral is an important determinant of firms’ employment decisions. Using administrative data for French firms, Chaney et al. (2013) show that shocks to the value of real estate have sizeable effects on employment and investment. The impact of collateral on investment appears to be larger for French firms than for the US firms covered by the Compustat database (Chaney et al., 2012).1 Moreover, investment appears to be considerably more sensitive to cash-flow variations in France, which suggests that French firms may be more financially constrained. To better understand how the labor market responds to shocks to the firms’ collateral value, this paper builds a canonical macroeconomic model with financially constrained firms and search frictions in the labor market. We calibrate the model to France and relate its business-cycle features to those in the data. In particular, we find that the model response to a shock to collateral value features amplification and propagation that are in line with those obtained from a VAR analysis. Our business–cycle model features collateral constraints and forward–looking land prices as in Kiyotaki and Moore (1997) and Kocherlakota (2000), on the one hand, and labor market frictions similar to Mortensen and Pissarides (1999), on the other hand. Firms hold productive land and capital, and they borrow in an international credit market, using land and (a fraction of) capital as collateral.2 In the labor market, firms post vacancies and they are matched with unemployed workers who are hired for production in the subsequent period.

Workforce movement from one employer to another creates dynamic labor market, which in turn contributes to building an efficient employment. On the other hand, excessive workforce mobility may lead to negative consequences due to the loss of human capital1 . According to the results of Eurofound study, in the pre-crisis period (2002-2007) Latvia had the lowest average continuous length of service or continuous employment with the same employer among the European Union member states – 7 years and 4 months2 . However, in the crisis period (2008- 2012) the average length of continuous employment in Latvia has increased significantly. In 2014 employees with a continuous length of service with the same employer for 10 years or more accounted for 30% of the total number of workers3 . This is slightly lower than the total level in the member states of the OECD (32%), but lags far behind the respective levels in the Continental Europe. For example, number of long-term employees in Italy was 50%, in France – 46%, in Belgium – 43%, in Germany – 42%, in Spain and in the Czech Republic – 41%. The development of long-term employment in Latvia creates favorable conditions for the companies regarding maximization in the return on investment in human capital as well as provides new challenges for maintaining high motivation in the existing workforce as well as attracting new workforce. According to the research results of experts from the Latvian banking sector on the changes in the Latvian labor market in 2008-2013, since 2010 it has been more difficult for the local employers to adjust the salaries of the existing workforce than it has been during the years of crisis4 . At the same time many companies experience lack of skilled workers, which, according to the medium- and long-term demographic forecasts, is growing5 , and it will be more difficult to find suitable workers. Even with the improvement of financial situation of the companies and therefore more ambitious investments in human capital, the negative demographic trends, in particular decrease of the number of the working age population, will lead to higher competition among companies in attracting and retaining the workforce. In the theoretical models of employee turnover the labor market situation6,7,8 and socio-demographic characteristics of employees6,9,10 are viewed as a separate set of factors. The objective conditions, such as the job growth rate and unemployment rate in the domestic and professional labor market11, number of visible companies12 and specific job offers13 may influence the employee’s views on how easy it is to change job and to encourage him/her to stay in the current workplace or leave it.

A large body of sociological literature has been accumulated regarding how social networks or social capital affect individual job outcomes in the labor market. Lin (2001) has classified relevant studies into three strands. The first strand, labeled “using contacts”, focuses on the effect of using social ties as compared to not using them. The second strand, labeled “accessible contacts”, addresses the role of the overall quantity or quality of resources embedded in one’s ego-centric networks. The third strand deals with the effects of “mobilized social capital” often measured by contact resources (i.e., resources of a specific contact who has offered substantial help in the job search). Central to the third strand of research is Lin’s (1999) social resource theory, which argues that the better, or the higherquantity of social capitalthatisused,the better job outcomes will be. However, replicating and extending the 1970 Detroit Area Study (DAS) by Marsden and Hurlbert (1988), Mouw (2003) prominently challenged the social resource theory by showing that once homophily (e.g., the similarity between the occupations of the job seeker and the contact) is considered, the role of contact prestige in status attainment becomes insignificant.1 Since previous empirical studies supporting Lin’s theory had not considered the presence of homophily, the estimated role of contact resources is very likely to be spurious and due to selection effects. To defend the social resource theory, Lin and Ao (2008) aptly pointed out that Mouw (2003) had erroneously coded the key variable of occupational homophily, or “same-occupation”. In particular, the comparison between the contact’s job and the respondent’s current job “cannot reflect social influence (e.g., a respondent approaching the contact for help in the labor market) that must precede the current position of the respondent” (Lin et al., 2013:26; emphasize by authors). Taking into account the “correctly” specified occupational homophily – i.e., to compare the respondent’s previous job and the contact’s job – recent studies have lent support to social resource theory (Lin and Ao, 2008; Son and Lin, 2012; Son, 2013; Lin et al., 2013; Bian et al., 2015). Although the debate has lasted for more than a decade, two issues raised by Mouw (2003) still deserve further investigation. First, the similarity of one’s “current job” and the contact’s job may affect the role of social capital, since “inside” job-leads can be more productive than “outside” job-leads, especially in a modern labor market like the US, where job information matters for job searches. In other words, the role of social capital may be moderated by occupational homophily and depend on particular labor market contexts.

The labor supply in the United States has experienced a substantial change over recent decades. While with the change in the US labor force generally holds hours worked as a function of sex and marital status, it is particularly true for the female labor supply. Findings from Jones, Manuelli and McGrattan (2003) show that hours worked by married women increased by roughly 30% over the time period from 1950 to 2000, while supply by married men decreased slightly over the same period. Moreover, hours worked by single women and single men remained almost constant over this time period. These trends have important and persistent economic and social effects. The progress in understanding factors behind female and family labor supply does not only require analysis of the gender wage gap, changes in the fertility rate, decrease in marriage and increase in divorce rates, and changing social norms, it also requires understanding of the business cycle response of men and women to adjustments in the labor market. The latter has, to the best of our knowledge, been neglected in the labor economics literature so far. The objective of this study is to assess the question whether men and women behave differently within the labor market adjustment process over the business cycle and to close this gap in the literature. Adjustments along the extensive margin are adjustments in the number of workers, while adjustments along the intensive margin are adjustments in the number of hours worked. It is important to distinguish between these two margins, because knowledge of the quantitative importance of the extensive and intensive margins is needed for economic models and policy. The relative strength of a margin alters the effects of policy reforms concerning the effects of taxes, labor market adjustments, and other policy changes related to female and family labor supply decisions. It is documented that many countries established policy programs to increase the participation rate of women in the way of tax benefits, increased child-care, or extended paid maternity leave, which includes for husbands as, for example, shown in Ray, Gornick and Schmitt (2009) or discussed in the “International Review of Leave Policies and Related Research” of the Department of Business (2007)i . Along this line, it is important to separate the extensive–intensive margin for men and women, as income taxes from benefit reforms that may have larger disincentive effects when the intensive margin is more important, which would increase labor supply elasticity.

Disability policies have recently attracted attention, particularly in OECD countries, because they represent an important share of public spending and also because societies are increasingly concerned about the need to promote the integration of people with disabilities. For these reasons, the possibility of increasing the number of disabled individuals who work is regarded as a good strategy to decrease pressure on the financial stability of social security systems as well as to achieve the social integration of people with disabilities (OECD, 2007). The impact of disability regulations on the employment of disabled individuals has been documented in a recent book by Burkhauser and Daly (2011) and in several papers for the case of the U.S. (Autor and Duggan 2006, 2007, 2008; Autor et al. 2011; Benítez-Silva and Heiland, 2007, 2008). With regard to the U.S. Social Security Disability Insurance (SSDI) program, researchers seem to agree that the disability program rules and, in particular, its work-contingent basis, have been the main explanation for the reported decline in the employment rates of individuals with disabilities. That is, individuals stop working to qualify for disability benefits even though they maintain some capacity to work. In line with this, the promotion of the employment of disabled individuals is particularly relevant for the Spanish case because, unlike other disability systems in developed economies, the Spanish system is not contingent on working status and, therefore, allows partially disabled individuals to work while they receive disability benefits. The puzzle is, however, that employment rates for this group of disabled individuals are very low: the country reported an average employment rate of just 13.6 percent for people with partial disability from 2001 to 2011, which contrasts with the observed rate for nondisabled employees (75.3 percent)1 . This suggests that, even in non-working contingent programs, hiring and fiscal regulations regarding disabled workers can generate disincentives to work. Therefore, in this paper we analyze the incentives and disincentives to work in Spain from the point of view of both disabled individuals and employers. The central goal of the study is twofold: (i) identify how differences in workers’ characteristics explain the low employment rates of partially disabled individuals vis-à-vis their nondisabled counterparts; (ii) analyze the sensitivity of the employment rates to changes in the parameters of the Spanish disability system. The final aim is to reach some conclusions about the types of policy initiatives that might be more effective in increasing both individual incentives to work as well as employers’ incentives to hire disabled workers.

مقاله سال 2016

The consequences of immigration on labor market outcomes and host country welfare have been extensively discussed in the economic literature, both theoretically and empirically. This paper analyzes the impact of an immigration-induced labor supply shock on the employment opportunities of native European workers. Theoretically, the labor market consequences of immigration have been framed within a standard neoclassical labor supply, labor demand framework (see Borjas (2003); Card (2001, 2005, 2009), and Ottaviano and Peri (2012)). In such a framework, in the short run, a labor supply shock generated by the arrival of immigrants triggers a reduction in the wages of competing natives, which in turn may discourage labor force participation. As a consequence, the crucial problem in this literature is determining against which natives immigrants are competing, and then, analyzing the distributional consequences of an immigration inflow (see for example Friedberg and Hunt (1995)). Yet, this framework has somewhat been challenged by empirical findings over the last two decades. Exploiting various experiences of immigration, in the US first, and more recently in Europe, the literature has failed to find a consistent negative impact of immigrants on natives’ labor market outcomes.

A more recent literature has put some explanations forward. On the one hand, one stream argues that natives and immigrants are never perfectly substitutable. Notably, according to Ottaviano and Peri (2012), immigrants and natives, in spite of having similar “observable” skills, are not perfectly substitutable in production. According to their estimates, newly arrived immigrants are substitutes for older immigrants whereas they are imperfect substitutes for natives. Peri and Sparber (2011, 2009) or D’Amuri and Peri (2014) justify this finding by considering different relative skill endowments between natives and immigrants. Whereas natives have a comparative advantage in communication skill intensive jobs, immigrants have a comparative advantage in manual skill intensive jobs. A complementary relation arises then between both types of workers. Following an immigration-induced labor supply shock, natives reallocate towards communication and language intensive tasks, while immigrants become specialized in manual intensive tasks. A second stream of literature analyzes how immigration may affect the labor market decisions of natives with different skills with respect to immigrants through general-equilibrium effects. For the US data, Cortes and Tessada (2011) find that the reduction in the price of services (being close substitutes for household production) stemming from recent waves of low-skilled immigration has provided incentives for high-skilled women (earning above the median of the wage distribution) to substitute their own time invested in the production of household goods with work hours on the labor market. A similar study using Spanish data is proposed in Farré et al. (2011). They find that over the last decade immigration has led to the significant expansion of the household service sector and to an increase in the labor supply of women in high-earning occupations. A third stream of literature focuses rather on the endogenous nature of technological change. Lewis (2011) looks at labor demand side adjustment, and shows that firms adjust to unskilled labor supply shocks by adopting less skilled-biased technology.

We propose an alternative factor explaining the absence of a negative impact on natives’ labor market outcomes: whatever the labor market considered, immigrants are newcomers. As a consequence, they lack host-country-specific labor market knowledge and other, although non directly productive, valuable assets. For instance, one such asset is the eligibility and amount of unemployment benefits which are conditional on past employment experience in host countries. These characteristics affect immigrants’ outside options and put them in a weaker bargaining position as compared to natives when they negotiate their wages with employers, making them more profitable workers. Following an inflow of immigrants, the average expected profit of firms operating in the receiving labor market increases, raising incentives to open more vacancies. We claim thus that, even if they are perfectly substitutable with natives in the production process, immigrants are at the origin of a positive externality.

مقاله سال 2016

In leading theories of monetary non-neutrality, the policy prescription for the optimal steady-state inflation rate varies between the negative of the real interest rate (the Friedman rule) and zero (price stability); see Schmitt-Grohé and Uribe (2010), for an overview. In this paper we explore a new channel where the interaction of nominal wage and labor market search and matching frictions affects the planner’s trade-off between the welfare costs and benefits of inflation. We show that the combination of such frictions can in fact generate a Ramsey optimal inflation rate that is significantly positive. Importantly, this is the case even in the presence of a monetary friction, which drives the optimal inflation rate towards the Friedman rule of deflation.

The mechanism we have in mind arises in a model with search frictions when nominal wages are not continuously rebargained and some newly hired workers enter into an existing wage structure.1 In this case, we show in a stylized model that inflation not only affects real-wage profiles over a contract spell, but also redistributes surplus between workers and firms, since incumbent workers impose an externality on new hires through the entry wage. Specifically, this affects the wage-bargaining outcome through the workers’ outside option and hence the expected present value of total labor costs for a match as well as firms’ incentives for vacancy creation. We derive a Hosios condition for the stylized model and show that the Ramsey planner has incentives to increase inflation if employment and vacancy creation are inefficiently low in order to push the economy towards the efficient allocation.

It is worth noting that this incentive vanishes at an efficient allocation, as in Thomas (2008) where the calibration is chosen so that the Hosios condition holds, and hence that search and wage setting externalities cancel out in steady-state (and the reverse occurs if employment is inefficiently high). Moreover, the model of Erceg et al. (2000) does not feature this mechanism either, since there is no extensive margin on the labor market in that model and hence the Ramsey planner has no leverage on job creation through the channel outlined above. However, and similar to our model, the Erceg et al. (2000) model features a markup in wage-setting where the actual markup can be different from the flexible price markup because of Calvo (1983)-style wage stickiness. The planner has incentives to tilt the real-wage profile in order to lower the actual markup and increase labor input. Note though, since the model lacks a leverage on job creation there is much less of a motive for the planner to use this channel and the effect of using inflation to affect the average markups in the economy is tiny.2 The mechanism also vanishes if search frictions vanish since the Ramsey planner loses any leverage over vacancy/job creation. Thus, models without an extensive margin on the labor market lack the mechanism described here. Furthermore, the Ramsey planner loses the ability to affect real-wage costs via inflation if all new workers get to rebargain their wage. In this case, the full effect of inflation on entry wages is internalized in the wage bargain, and firm and worker surpluses, as well as real wage costs, become neutral to inflation.