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Abstract
Using detailed administrative data from Spain, we investigate the impact of having an initial work experience in an employee-owned firm (EOF) versus a conventional business on subsequent earnings. We find that young workers’ exposure to EOFs at the time of labour market entry reduces earnings by about 8% during the first 15 years in the labour market. The selection of individuals with low initial ability in EOFs does not appear to be a relevant channel. Our results seem to be rather related to differences in job mobility and wage returns to experience. On the one hand, we document lower wage returns to experience acquired in EOFs, although no differences in subsequent career progression in terms of promotions. On the other hand, we find that workers who had their first job in EOFs show a strong attachment to such a business model and are less likely to voluntarily leave their employers. Taken together, our findings suggest the existence of nonpecuniary job attributes offered by EOFs that might compensate for lower lifetime earnings.
Keywords: Employee-Owned Firms, Careers, Wages, Job Mobility
JEL Classification: J31, J50, J62
Working Paper Series

Working papers disseminate economic research relevant not only to the tasks and functions of the Bank of Lithuania and of the European System of Central Banks but also appealing more broadly to the academic community in economics and finance. They present, discuss and analyse the results of original and academically rigorous theoretical and/or empirical research. Working papers constitute the basis for publications in leading academic journals, making contributions to the existing literature in the fields of economics and finance. They encourage collaboration between the researchers of the Bank of Lithuania and other central banks, Lithuanian and foreign universities and research institutes.
Papers are only available in English.
Employee-Owned Firms and the Careers of Young Workers
Workers' job mobility in response to severance pay generosity
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Abstract
This paper studies the impact of severance pay generosity on workers' voluntary mobility decisions. The identification strategy exploits a major labor market reform in Spain in February 2012 together with the exposure of some workers to a layoff shock. I rely on rich administrative data to estimate a discrete time duration model with dynamic treatment effects. The results show that a decrease in mobility costs induced by a reduction in severance pay made workers who expected to be displaced in the near future more likely to voluntarily leave their employers. The results indicate that policies targeting employers may also affect workers' behavior. They further reveal the relevance of taking into account interactions between employment protection and unemployment insurance.
JEL Codes: J62, J63, J65.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Statutory, effective and optimal net tax schedules in Lithuania
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Abstract
We estimate effective and optimal net income tax schedules and compare them to estimated statutory rates for the case of Lithuania in the period 2014-2015. Values of effective net tax rates are estimated from the survey of EU Statistics on Income and Living Conditions, the statutory net tax rates are estimated with the European tax-benefit simulator Euromod, while optimal net taxes are calculated via Saez (2002) methodology. We find that the three net tax schedules are similar for employees in the middle of the income distribution. At the bottom of the income distribution, optimal net tax schedules suggest higher in-work benefits. The net tax schedules diverge substantially for the self-employed. At the top of the income distribution, where the majority of self-employed are concentrated, the self-employed are required to pay 15 cents less net taxes per euro than employees - and they effectively pay 29 cents less.
JEL Codes: H2, H21.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Employment and Wages over the Business Cycle in Worker-Owned Firms: Evidence from Spain
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Abstract
This paper compares worker-owned firms and mainstream capital-owned enterprises over the business cycle. Specifically, I study whether conventional employees in worker-owned firms enjoy greater employment stability than similar workers in traditional enterprises over the business cycle, and investigate whether this stability is associated with greater volatility of working-time or wages. Unlike the literature that has compared partners of cooperatives to wage-earners of mainstream firms, I compare wage-earners across both type of organizations along the three margins of adjustment. To perform the econometric analysis, I rely on rich Spanish administrative data and panel data methods to account for composition differences between the two types of organizations. The results show that worker-owned firms offer higher job security because they do not adjust employment levels over the business cycle as much as mainstream enterprises. Wages and working-time, instead, are equally responsive across the two types of firms. The findings can be rationalized by the presence of similar labor regulations and differences in the objectives of the two type of organizations. Namely, both types of firms are constrained by regulations, such as the national Labor Code and collective bargaining, on the adjustments they can impose on wages and working-time. However, the social nature of worker-owned firms mitigates employment volatility in these organizations.
JEL Codes: J21, J31, J54.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
More Gray, More Volatile? Aging and (Optimal) Monetary Policy
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Abstract
The empirical and theoretical evidence on the inflation impact of population aging is mixed, and there is no evidence regarding the volatility of inflation. Based on advanced economies’ data and a DSGE-OLG model - a multi-period general equilibrium framework with overlapping generations, - we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper is also the first to discuss, using this framework, how aging affects the short-term cyclical behavior of the economy and the transmission channels of monetary policy. Further, we are also the first to examine the interplay between aging and optimal central bank policies. As aging redistributes wealth among generations, generations behave differently, and the labor force becomes more scarce with aging, our model suggests that aging makes monetary policy less effective, and aggregate demand less elastic to changes in the interest rate. Moreover, in more gray societies central banks should react more strongly to nominal variables, and in a very old society the nominal GDP targeting rule might become the most effective monetary policy rule to compensate for higher inflation volatility.
JEL Codes: E31, E52, J11.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Does It Matter When Labor Market Reforms Are Implemented? The Role of the Monetary Policy Environment
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Abstract
Do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed? Since economic theory usually pays attention to the steady state change and ignores business cycle interactions of structural reforms, we connect local projection methodology with the Mallow’s Cp averaging criterion to arrive at an inference that does not require knowledge of the exact functional form, is robust to mis-specification, admits non-linearities, and cross-sectional dependence and addresses uncertainty regarding interactions between labor reforms and macroeconomy. We also develop a test to check the importance of monetary policy for any horizon and the entire impulse response function, taking the multiple testing problem into account. We document that replacement rates deliver substantially different outcomes on real GDP, inflation and real effective exchange rate, whereas labor activation schemes bear different effects on unemployment in low- and high-interest rate environments. There is also evidence of monetary policy trend playing an important role as well as increasing synchronized monetary and labor market policies across European countries.
JEL Codes: C33, C54, E52, E62, J08, J38.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Does monetary policy affect income inequality in the euro area?
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Abstract
This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999–2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy.
JEL Codes: D63, E50, E52.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
The changing nature of gender selection into employment over the Great Recession
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Abstract
Online appendix (204.3 KB download icon)
The Great Recession has strongly influenced employment patterns across skill and gender groups. This paper analyzes how the resulting changes in non-employment have affected selection into jobs and hence gender wage gaps. Using data for the European Union, we show that male selection into the labour market, traditionally disregarded, has become positive. This is particularly so in Southern Europe, where dramatic drops in male unskilled employment have taken place during the crisis. As regards female selection, traditionally positive, we document two distinct effects. An added-worker effect has increased female labour force participation and hence reduced selection in some countries. In others, selection has become even more positive as a result of adverse labour demand shifts in industries which are intensive in temporary work, a type of contract in which women are over-represented. Overall, our results indicate that selection has become more important among men and less so among women, thus changing traditional gender patterns and calling for a systematic consideration of male non-employment when studying gender wage gaps.
JEL Codes: J31.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Technology trade with asymmetric tax regimes and heterogeneous labor markets: Implications for macro quantities and asset prices
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Abstract
The international diffusion of technology plays a key role in stimulating global growth and explaining co-movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude toward innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy flexibility and higher labor market rigidity. We develop a two-country model, in which both countries rely on R&D and adoption, to study the shortand long-run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates future economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, it helps to explain the differences in macro quantities and equity returns observed in the international data.
JEL Codes: E3, F3, F4, G12.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Labour market institutions in open economy
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Abstract
This paper builds a theoretical model that introduces frictional unemployment in a two-sector multi-worker heterogeneous firms model with a dynamic matching process. In doing so, we have a rich environment that combines product, labour, and international markets. A change in labour market policies (unemployment benefits and employment contingent subsidies) transforms the share of exporters and affects average productivity. Empirical evidence confirms a robust positive effect of employment subsidies on openness, little, if any, impact of subsidies and a positive effect of replacement rate on unemployment. Closure of equilibrium plays an important role to explain data facts about employment subsidies: using sectoral arbitrage condition, subsidies cease affecting unemployment and make openness grow, consistently with the empirical evidence. Unemployment benefits, on the other hand, make unemployment and openness rise, independently of sectoral reallocations. In addition, we find that unemployment benefits bear different policy implications with regards to international coordination than employment subsidies.
JEL Codes: E24, F12, F16.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Aging, (pension) reforms and the shadow economy in Southern Europe
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Abstract
Southern Europe is currently experiencing a double-whammy: high levels of government debt coupled with a rapidly aging population. Thus, the consolidation of (pension) budgets seems inevitable. In this paper we examine the short- and long-run macroeconomic effects of public old-age pension reforms and other fiscal policies under conditions of population aging. To do so, we calibrate OGRE, a New Keynesian model with overlapping generations, unemployment and an underground sector to match annual data on Portugal and Spain. Our main finding is that a retirement-age increase is the least harmful policy with respect to long-run output. However, we raise some doubts about the feasibility of implementing this policy.
JEL Codes: E24, E26, H55, J11, J46.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
A detailed description of OGRE, the OLG model
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Abstract
In this paper we present the structure of OGRE, a dynamic general equilib-rium model with overlapping generations, unemployment and a shadow economy. Based on a parametrized version of the model, we examine the impacts of aging and calculate multipliers of public pension and other fiscal policies. Also, we contrast macroeconomic reactions with pay-as-you-go and fully funded pension plans. Lastly, we highlight the role of unemployment and that of the underground sector in the framework.
JEL Codes: E24, E26, H55, J11, J46.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Labour shares, fertility and longevity in an OLG model
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Abstract
This paper studies the link between demographic factors and labour shares as well as tries to answer the question whether population ageing is responsible for the global decline in labour shares. We found that the link depends on the elasticity of substitution between labour and capital as production factors. Given the empirical estimates of this parameter, we conclude that population ageing is not responsible for the global decline in labour shares. On the contrary, it reduces the speed of this decline.
JEL Codes: E25, C51, J14.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Population ageing and inflation with endogenous money creation
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Abstract
This paper provides an explanation as to why population ageing is associated with deflationary processes. For this reason we create an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. In other words, we combine a neoclassical OLG model with post-Keynesian monetary theory. The model links demographic factors such as fertility rates and longevity to prices. We show that lower fertility rates lead to smaller demand for credits, and lower money creation, which in turn causes a decline in prices. Changes in longevity affect prices through real savings and the capital market. Furthermore, a few links between interest rates and inflation are addressed; they arise in the general equilibrium and are not thoroughly discussed in literature. Long-run results are derived analytically; short-run dynamics are simulated numerically.
JEL Codes: E12, E31, E41, J10.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Global perspective on structural labour market reforms in Europe
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Abstract
Appendix (6.9 MB download icon)
Recent turbulent times have once again demonstrated how important flexible product and labour markets are to dampen the effects of adverse economic shocks. A number of labour market reforms have been implemented to enhance economic resilience and flexibility. However, accounting for the efficacy of policy interventions requires going beyond national boundaries and evaluating international interactions and global interdependencies, which may strengthen or weaken economic responses. Concentrating on open European economies, this paper deals with labour market institutions and structural reforms in a general equilibrium framework, which allows to analyse the intricate connections between labour policy choices and international trade (openness), paying special attention to labour market policy shocks. Amid discussions about a fiscal union in Europe, we empirically demonstrate that labour market policies can have positive and negative spillovers to trading partners, thereby calling for coordinated policies within a trading bloc. We answer three types of questions: what would have happened had all economies implemented structural labour market reforms simultaneously? How heterogeneous are responses in a single economy to shocks conducted in every other country? Relatedly, how heterogeneous are responses by all economies to a reform in one given economy?
JEL Codes: C32, C33, E24, F12, F16.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Optimal asymmetric taxation in a two-sector model with population ageing
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Abstract
This paper presents a simple condition for optimal asymmetric labour (capital) taxation/subsidization in a two-sector model with logarithmic utilities and Cobb-Douglas production functions, linked to demographic factors: fertility rate and longevity. The paper shows that depending on parameter values, it may be optimal to tax or subsidize labour in the sectors. If it is optimal to tax the investment-goods sector, a Pareto-improving tax reform is possible. Larger output elasticities of capital in the sectors reduce the possibilities of a Pareto-improving reform, while population ageing in terms of higher longevity enhances the possibilities of welfare improvement for all generations. Fertility rates do not affect optimal taxation.
JEL Codes: E62, H21, J10.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
New Keynesian Phillips curve in Lithuania
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Abstract
The paper provides estimates for the New Keynesian Phillips curve (NKPC) in Lithuania. The paper considers the baseline and hybrid NKPC, the latter accounting for inflation inertia, under the closed and open economy frameworks. The estimates highlight the importance of expected and lagged inflation in the inflation formation process. The role of real marginal cost is found to be limited in shaping the dynamics of inflation. The study yields estimates for the underlying characteristics of pricing behaviour in Lithuania. The estimates show that the price duration stands at around 2.2–2.8 quarters, while the fraction of firms that adjust prices in a backward looking way amounts to around one third.
JEL Codes: D40, E30.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Wage and price setting behaviour of Lithuanian firms
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Abstract
This paper investigates the wage and price setting behaviour of Lithuanian firms on the basis of an ad hoc survey “On Price and Wage Setting” undertaken by the Bank of Lithuania. The paper provides survey evidence on the frequency of wage and price changes. The frequency of wage changes turns out to be higher in firms that apply collective pay agreements, while the frequency of price changes appears to be positively affected by the market competition. Labour cost share is not found to be significant in making the impact on the frequency of price changes. This paper also investigates the role of certain technological, institutional and other factors in shaping firms’ responses to a negative demand shock, an intermediate input cost shock and a wage shock. A higher labour cost share is found to increase the likelihood of a price increase following a wage shock. Flexible wage components mitigate firms’ responses to a slowdown in demand and an intermediate input cost increase. The behaviour of firms following the investigated shocks is also affected by the level of competition. The role of collective pay agreements appears to be rather limited in shaping responses of firms to the shocks.
JEL Codes: D40, J30.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Personal income tax reform in Lithuania: Macroeconomic and welfare implications
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Abstract
In this paper, the economic impact of the 2006–2008 personal income tax (PIT) reform in Lithuania is analyzed applying model-based simulations. We find that the undertaken PIT reform is unsustainable as it leads to permanent government budget deficits and ever increasing public debt. This result holds even allowing for endogenous reduction in tax evasion. After introducing permanent compensatory fiscal measures ensuring long-term sustainability of the PIT reduction, we demonstrate that the lower PIT produces higher output and lower prices in the long run. Higher domestic spending is supported by higher employment and after-tax wages. Moreover, following a reduction in the marginal production costs, producer prices fall enhancing economy’s international competitiveness and boosting domestic exports. Pre-announcement of the tax reform implies early macroeconomic reaction, and thus in most cases smoother adjustment of the economy to the tax change.
JEL Codes: E62, H24, H25, H26.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.