Overtime Work, Non-Wage Labour Costs and Structural Mismatch : Some Extensions of the "European Unemployment Programme" Framework

The paper extend some key elements of the EUP framework. First, the number of working hours and the number of jobs are treated separately. Neglecting the interactions between hours and jobs might, for instance, lead to too optimistic predictions concerning the effects from reducing the working week, since firms adjust their overtime to reduce their fixed non-wage labour costs per hour. Moreover, since firms use overtime as a buffer, labour becomes binding only after running a feasible amount of overtime. Second, non-wage labour costs become more and more important as en explicit cost component in the profit maximizing process. In Germany, for instance, the share of non-wage labour costs in total labour costs amounts to roughly 50 percent in 1990 (compared to 30 percent in 1996). Within the extended EUP framework, non-wage labour costs will serve a second purpose. They are introduced as an economic factor explaining mismatch of the Lambert-type CES employment function. In addition to mismatch on the labour market, we exploit survey data to identify mismatch on the goods market. This exercise not only allows us to give estimates of structural underutilization on the labour and on the goods market, but we can also separate the share of excess capacity that has its virtual origin in labour market maladjustments.