Declining high-wage industries and structural adjustment policy

Frank Barry

No 198907, Working Papers from School of Economics, University College Dublin

Abstract: In this paper a sector-specific disturbance generates unemployment that co-exists with relatively high wages in the adversely-affected industry. Previous analyses have interpreted this unemployment as "classical" in nature, assuming it to be caused by arbitrary wage rigidities, and have concluded that some degree of subsidization of the contracting sector is warranted on efficiency grounds. The present paper proposes an alternative "structural" explanation in which the privately-optimal response of workers and firms within a unionised high-wage industry leads to inefficiently low levels of labour transfer and a correspondingly high rate of sectoral unemployment. Subsidisation of the declining industry under these circumstances reduces efficiency. Several policies capable of achieving the optimal allocation of labour are explored, and the associated tax costs and income distributional effects analysed.

Keywords: Unemployment--Effect of wages on; Wages; Structural adjustment (Economic policy) (search for similar items in EconPapers)
Date: 1989-04
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:198907

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