5/2004 Marit Hinnosaar. Estonian labor market institutions within a general equilibrium framework

Working Papers of Eesti Pank. No 5, 2004

The implications of the Estonian labor market policy reforms, such as changes to the minimum wage, social benefits and tax allowance, will be analysed using a simple applied general equilibrium model. The model used in the paper is from Bovenberg et al (2000), with the addition of an efficiency wage section based on Shapiro and Stiglitz (1984). The model integrates union bargaining and efficiency wage theory into a traditional CGE model framework.
JEL Code: D58, E62, J32, J50
Key words: computable general equilibrium models, unemployment, lowskilled labor, minimum wage, benefits, tax allowance

* The author thanks Aurelijus Dabusinskas, Toomas Hinnosaar, Reimo Juks, Rasmus Kattai, Märten Kress, John Lewis, Peeter Luikmel, David Mayes, Martti Randveer, Risto Vaittinen, Lenno Uusküla, and seminar participants in University of Tartu for helpful comments.

Authors' e-mail addresses: marit [at] hinnosaar.net

The views expressed are those of the author and do not necessarily represent the official view of the Bank.

Contents

1. Introduction
2. Wage Setting, Unemployment Benefits and Labor Taxes in Estonia
3. Description of the Model
3.1. General Overview
3.2. Households
3.3. Firms
3.4. Labor Market
3.4.1. Wage Bargaining
3.4.2. Efficiency Wage for High-Skilled Workers
3.5. Government
3.6. Foreign Trade
3.7. Equilibrium
4. Data and Calibration
5. Simulations
5.1. Description
5.2. Simulation Results
5.2.1. An Increase in Union Bargaining Power
5.2.2. An Increase in Replacement Rate
5.2.3. An Increase in Tax Allowance
6. Concluding Remarks
References
Appendices
Appendix 1. Main equations of the model
Appendix 2. Labor supply
Appendix 3. The impact of labor market institutions on labor supply
Appendix 4. First order conditions of CES function
Appendix 5. Ideal price index in case of CES function
Appendix 6. Profit maximisation
Appendix 7. The impact of wages on prices
Appendix 8. Labor demand
Appendix 9. Maximisation of Nash function
Appendix 10. The impact of labor market institutions on the low-skilled workers' wage
Appendix 11. Efficiency wage
Appendix 12. Data description

Estonian Labor Market Institutions within a General Equilibrium Framework, Working Papers of Eesti Pank No 5, 2004 (PDF*)

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