Archive for October 28th, 2011

Want to limit role of unions …invite more FDI…

October 28, 2011

Andreas Haufler &  Ferdinand Mittermaier write this nice post.

They say it is ironical that more unionised countries get more FDI:

In the international competition for FDI, countries and regions with strong trade unions and relatively high wages are often surprisingly successful. Theoretical economic reasoning would typically suggest that unionisation, which tends to increase the level of wages, will act as a deterrent to FDI (Naylor and Santoni 2003; Munch 2003). Nevertheless, several empirical studies find instead a surprising positive effect of unionisation on direct investment (e.g. Friedman et al. 1992).

Why so? Well FDI helps policymakers negotiate with Unions for more jobs and lesser wage raise:

In recent research (Haufler and Mittermaier 2011) we show that high subsidy payments can be a rational policy for governments, as they give trade unions an incentive to exert wage restraint in exchange for additional jobs that are created in the newly-attracted firms. A government that acts in the best interest of its citizens will therefore be willing to offer multinational firms a subsidy that more than compensates the firm for the higher wage cost in that region. These subsidies not only induce the multinational firm to locate in the unionised country, but they also ensure that the union prefers a situation with lower wages and FDI to the alternative of setting a high wage but accepting low employment (which then occurs only in domestic firms). As a result, the unionised country or region is able to “win” the competition for FDI over its less-unionised neighbour. The subsidisation policy benefits the high-wage country in the aggregate, because union power is effectively curbed and wages are lower than they would be in the absence of the successful bid for FDI.

This does not mean unionisation is good for a country. Infact countries which want to limit the power of unions should invite more FDI:

The results of this research do not imply that unionisation is “good” for a country. In fact the high-wage country remains worse off than its lower-wage neighbour because of the high subsidies it has to pay to attract FDI. However, if the unionised country is not able to control wages directly (for example, because they are determined in a bargaining process between employers and employees, with no government involvement), then attracting multinational firms is an attractive solution for governments, in order to mitigate the effects of union power.

Superb. Some lessons for India possibly?

All such write-ups take you to micro classes in college as one really does not talk/read about unions/collective bargaining power much…


RBNZ Governor’s amazing forecast

October 28, 2011

I hardly watch Rugby. But on knowing that  NZ (or Black Caps) won the rugby WC 2011 (after 24 years of wait), could not stop pointing about this prediction.

RBNZ Governor in a Jan-11 speech predicted/forecasted:

How likely is it that New Zealand will win? We have asked our expert team of forecasters to answer this question. They have pointed out several solid facts: we have always won the World Cup at home; we will have a Cantabrian leading the team and another directing the back-line. Our expert team of forecasters predict that on average, the All Blacks will beat Australia in the final at Eden Park, by 23.9 to 15.6.

🙂 The final was instead between NZ and France and was a much closer score line of 8-7.

Hope we could get our economics forecasts somewhat closer….


Why don’t economists blog in Italy? (Same could be applied to India as well..)

October 28, 2011

Paolo Manasse, Econ Professor at the University of Bologna ponders over this issue.

He points to this new paper by McKenzie and Özler which looks at economics of blogs. They say blogs help in three things:


The fudging from European policymakers continues

October 28, 2011

I read a paper (even posted on this blog, can’t locate it now) which said though Americans are blamed for all the financial jazz, it is Europeans who are masters at the art of financial creativity. This is what you see in the crisis solutions from EU policymakers.

I think Henry Farrell just nailed it by saying the instinct of EU policymakers is to fudge. The solution from policymakers looks innovative at first and markets think crisis is over. Then they look at the details and realise all is just a mask and the face behind is the same.

The so-called Europe Summit produced another of such financial jazz solutions. They released a statement of their new measures. The shorter version is here. A nice report from Citigroup is here

The broad proposals are (from whatever I could understand):


The impact of 2007 recession on youth

October 28, 2011 has compiled this collection of articles which looks at the impact of  the US recession on its youth.

Here are the 20 impacts:


India’s long-term growth potential and the implications for Australia

October 28, 2011

Ben Ralston, an economist at Australian Treaury alerts me to this paper.

The Central bank of Australia keeps telling us  about the importance of China to Aus economy (RBA even opened an office in China). Here is an Indian flavor as well.

The paper suggests India has strong growth prospects. Demographics is in place with a much younger age population compared to other countries. The authors point two challenges with this – food security and education. Growing incomes would demand higher food and need higher productivity. To realise  demographic dividend, education and training takes center stage. Surprisingly it says education is a challenge India is winning:


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