Essays on Macroeconomic Asymmetry and UK Labour Markets

Abstract

This thesis contains four chapters. Chapter One presents an introduction to the chapters that follow. Chapters Two to Four each have a distinct research focus with an underlying New Keynesian dynamic stochastic general equilibrium framework. Chapters Two and Three build on earlier collaborative research with Chris Martin. In Chapter Two, I use Behavioural theory to explain nonlinearities in the UK macroeconomy. Chapter Three presents a search frictions model of graduates and non-graduates in the UK labour market, simulating the differing impacts of the COVID-19 pandemic on both categories of worker. Chapter Four discusses the implications of the rising gig economy for wages and output in the UK.

Behavioural Downward Wage Rigidity and Macroeconomic Nonlinearity
A growing body of evidence suggests that the macroeconomy is not linear: shocks have a stronger impact on output in recessions than in expansions, negative shocks have a stronger impact on output than positive shocks of the same magnitude, large and small shocks have disproportional impacts on output, inflation and the real wage. To explain this, I develop a New Keynesian model with downward real wage rigidity, which I motivate using behavioural arguments. Workers experience disutility from exerting effort during production, but they also derive satisfaction from exerting effort when they feel ‘fairly’ treated by the firm. These behavioural elements generate the downward real wage rigidity which implies a convex Phillips Curve that is flatter when the output gap is negative. In the model, the intersection of the aggregate demand curve with this convex Phillips Curve generates nonlinearity that matches the empirical evidence.

To demonstrate non-linearity and asymmetry, I simulate the impacts of small and large, and positive and negative aggregate demand shocks. The results suggest that high inflation can be beneficial; the Phillips curve being steeper when the output gap is positive and flatter when the output gap is negative implies that at moderately high levels of inflation, much higher levels of output can be attained.

Modelling the Differing Impacts of COVID-19 in the UK Labour Market
Due to the actual and potential loss of life from the COVID-19 virus outbreak, the UK government announced a nationwide Lockdown in March, 2020. Businesses were closed, movement was restricted and many workers began working from home, albeit with reduced productivity. Workers who were unable to work from home were faced with job loss and the data shows marked differences in the impact of the pandemic across different sectors and types of worker. We model the impact of the pandemic on graduates and non-graduates in the UK. We use a model that is designed around key features of the UK labour market, which we simulate using shocks designed to mimic the pandemic. The model predicts that non-graduates would face more adverse impacts of the pandemic than graduates: about 1.2 million non-graduates would lose their jobs by the end of 2020, compared to 0.4 million for graduates, and by the end of 2020Q3, about 2 million non-graduates would be unemployed, compared to below 1million graduates.

The chapter describes the differing labour market experiences of different types of worker in the UK Labour market during the COVID-19 pandemic, and highlights the importance of accounting for segmented markets in policy-making.

The Impact of the Rising Gig Economy on UK Wages and Output
The nature of work in the UK is changing. Before the last 30 years, gig work was an option for firms to temporarily cut costs or respond to macroeconomic shocks, and for workers between traditional employment or to earn additional income. Now, gig work is becoming the ‘new normal’; compared to the EU, the UK has the highest proportion of the workforce engaged in some form of gig work and the number continues to rise. I examine the implications for wage and output growth.

I construct a dual labour market search frictions model that describes the increasing distinction between the gig and traditional sectors in the UK. The model explains the difference in the wage for the same type of job between the traditional and gig sectors. I show that the rising gig economy can explain the UK’s slow wage and output growth in the past decade. The results also support the evidence that gig work can be a stepping stone to traditional employment and vice versa, but it makes job-finding difficult for the unemployed. The results also show that the presence of the gig economy in the UK changes the macroeconomic response to shocks and can potentially reduce the effectiveness of policies.

Date of Award	21 Jul 2021
Original language	English
Awarding Institution	University of Bath
Supervisor	Christopher Martin (Supervisor) & Nikolaos Kokonas (Supervisor)