THE DYNAMIC BEHAVIOUR OF EMPLOYMENT (WAGES, CONTRACTS, PRODUCTIVITY, BUSINESS CYCLE)

Macroeconomic data has long presented certain puzzles about the underlying structure of labour markets. The three essays in this thesis address some of the puzzles using data on a number of individual U.S. manufacturing industries. The issues considered can be expressed in terms of the persistence, amplitude and asymmetry of fluctuations in employment.

The first essay attempts to distinguish empirically between three different dynamic optimizing models of labour market behaviour: a model with non-time separable utility functions for labour suppliers; a model with costs of adjustment in employment; and a model with lags in production. Although all three models have drawbacks that seem to arise from the simplicity of functional forms required for empirical application, the costs of adjustment model performs far better than the other two. Costs of adjustment seem to constitute an important reason for the presence of persistence in employment data.

The second essay investigates whether, in the industry data, employment is surprisingly volatile given observed wage fluctuations, or alternatively, whether wages are surprisingly sticky, by documenting the degree of real and nominal wage stickiness; and by estimating a structural model of optimal wage contracts based on income and profit insurance motives. The presence of wage stickiness is confirmed for the industry data set, particularly for nominal wages. The wage contract model produces reasonable econometric results; but cannot be a full explanation for the phenomena of interest since it explains real and not nominal wage rigidity.

The final essay considers asymmetry in employment cycles and focusses in particular on the 'end-of-expansion' productivity phenomenon: that is, a sharp fall in average productivity at the peak of the business cycle arising from longer expansions and shorter contractions in employment than in output. Again, the existence of the phenomenon is confirmed for the industry level data. It is found to be particularly strong during periods of relatively turbulent economic events. This observation motivates a discussion of the theoretical reasons for the existence of the 'end-of-expansion' phenomenon.

To summarize, the thesis assesses and confirms some well-known empirical results from aggregate wage, employment and output data for an industry level data set. It also considers the extent to which the empirical results support or contradict various theoretical models of the labour market.