Labour Policies for Inclusive Growth

Project Information

LPIGMANN

Grant agreement ID: 834455

DOI

10.3030/834455

Project closed

EC signature date 11 July 2019

Start date 1 October 2019

End date 31 March 2025

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 2 175 289,00

EU contribution

€ 2 175 289,00

Coordinated by

LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
United Kingdom

Periodic Reporting for period 4 - LPIGMANN (Labour Policies for Inclusive Growth)

Reporting period: 2024-04-01 to 2025-03-31

Summary of the context and overall objectives of the project

Most advanced economies have struggled to deliver inclusive growth in recent decades. Many voters are fearful about the impact on their lives of technological change, large-scale immigration, and a shifting balance of power in the labour market that appears to benefit employers at the expense of workers. There is a widening gap in economic fortunes between ex-industrial areas and dynamic cities with service-based economies. The stakes are high: we should not be surprised if some voters no longer support growth-enhancing policies if they do not see themselves as benefitting from growth.
While it is easy to identify the problems, diagnosing the causes and finding solutions that can deliver inclusive growth is more difficult. The objective of this proposal is to improve our understanding of the causes with the ultimate aim of improving policies.
To achieve these objectives better conceptual frameworks are needed. Too often, existing approaches in economics are not fit for purpose. So the proposal aims to build on existing analytical frameworks to understand the problems better. For example, the labour market is often modelled as if it is extremely competitive and the high intensity of competition among employers is sufficient to ensure that growth will be inclusive. In contrast, this project takes the approach that employers have considerable market power over their workers and some form of regulation is needed to ensure an appropriate balance of power. And the literature on immigration often simply considers the impact of the level and mix of migration without much consideration of how the policy tools available to government might affect outcomes.
But the objectives of the project are not just to develop better ways of thinking about the impacts of technology, immigration and market power on the economy, but also to use those methods to help us design policies for the real world. How should skills policies adapt to the changing nature of technology? How can we ensure an appropriate balance of power between workers and their employers? How can immigration policies be designed to realize the benefits it offers but to minimize the costs?

What has this project delivered? It has provided more evidence that imperfect competition is pervasive in the labour market and developed tools that enable us to measure it better. Having provided diagnostic tools for where labour market power is a problem, the project also hints that institutions like the minimum wage and trade unions may be effective tools to combat employer labour market power. On migration, the project has bridged the gap between academic research and the choices faced by policy-makers. It helps move beyond the (unfruitful) discussions of immigration good v. immigration bad that characterise so much debate on migration to the difficult trade-offs faced by policy-makers in designing migration policy. We will have migration but we will also have migration policy and the research project has shown how to do this.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

The work has been on the three main areas of the project; market power in labour markets (monopsony), immigration and the impact of technology on the labour market.
There are commonly thought to be two main sources of employer market power over their workers; first, that it costs time and money to change jobs and, second, that workers care about many aspects of jobs apart from the wage so that it is hard for them to find another employer that is identical (or better) in every dimension. Work so far has combined these explanations into a single, unified framework and used that to investigate how employer market power varies across the wage distribution within markets, over the business cycle and over time.
The project has also investigated how the presence of employer market power affects the labour market impact of immigration. Employer market power typically means that wages are lower than the value of what workers produce, so firms make a profit on all workers. The project found evidence that the labour market for immigrants is less competitive than for the local-born and that one consequence of this is that higher immigration can reduce wages for both the migrants themselves and the local-born. However, immigration need not have this effect if policy is designed appropriately; the research investigates the likely impact of regularizing unauthorised migrants.
Other research has investigated how income affects the desire to migrate and preferred destinations. We find evidence that those wanting to migrate have a strong preference for moving to high-income countries. On emigration, we find that both personal income and aggregate income matter. In poorer countries richer people are more likely to want to emigrate, while the opposite is true in richer countries. In looking at the impact of origin country income on the desire to emigrate, we find little evidence for the common view that, up to a point, increases in origin country income increase the desire to migrate.
Many people believe that one reason many feel the economy no longer works for them is that work in high income countries has become less secure, a product of changing technology and declining regulation. Our research into Germany, UK and US, suggests that the data do not support this view. In all the countries we study, subjective job insecurity is not higher than it was decades ago.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

The project so far has extended the state of the art in a number of dimensions. First, the research has developed a way of thinking about the labour market impact of immigration in the context of a labour market where employers have market power. This increases the benefits to the locals of immigration but also exacerbates the distributional issues with immigration likely to increase the profits of firms even as it may reduce the wages of some workers. The research also suggests ways immigration policy could mitigate these effects.
Second, it has extended our conceptual framework for thinking about imperfect competition in the labour market by combining the two main sources of employer market power (frictions and idiosyncrasies) in a single over-arching framework. This clarifies the role that different measures of market power have.
For the second half of the project, there are a number of research papers near completion. One looks at how sensitive occupational choice is to wages and other factors. We know that technology alters the demand for different occupations; this project will tell us how easy it is for workers to change occupations. Another project looks at the determinants of return migration, which is important for understanding the link between immigration policies that typically affect the inflow of migrants and the total stock of migrants. Another looks at the impact of immigration on productivity. And a final project develops a new way to investigate how sensitive the recruitment of firms is to the wages they pay.
Looking further ahead, there are a number of research strands in early stages. First, there is research into the impact of immigration on prices, profits and productivity, extending the usual studies of the impacts on wages and employment. Second, there is research into the different measures of employer labour market power used in the academic literature, seeking to link them to outcomes such as wages. And also further developments of methods to estimate the extent of employer market power.

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