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Labor Contracts, Equal Treatment, and Wage-Unemployment Dynamics

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  • Andy Snell
  • Jonathan P. Thomas

Abstract

This paper analyses a model in which firms cannot pay discriminate based on year of entry. It is assumed that workers can costlessly quit at any time, while firms are committed to contracts. We solve for the dynamics of wages and unemployment, and show that real wages display a degree of downward rigidity and do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match the actual unemployment series. We also show that equal treatment follows from the assumption of at-will employment contracting in our model. (JEL E24, E32, J31, J41)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 2 (2010)
Issue (Month): 3 (July)
Pages: 98-127

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Handle: RePEc:aea:aejmac:v:2:y:2010:i:3:p:98-127

Note: DOI: 10.1257/mac.2.3.98
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  1. Gottfries, Nils & Sjöström, Tomas, 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Working Paper Series, Uppsala University, Department of Economics 1998:10, Uppsala University, Department of Economics.
  2. Michael W. L. Elsby, 2005. "Evaluating the Economic Significance of Downward Nominal Wage Rigidity," CEP Discussion Papers, Centre for Economic Performance, LSE dp0704, Centre for Economic Performance, LSE.
  3. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(2), pages 252-70, April.
  4. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 921-55, November.
  5. Shin, Donggyun & Shin, Kwanho, 2008. "Why Are The Wages Of Job Stayers Procyclical?," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 12(01), pages 1-21, February.
  6. Lorne Carmichael, 1981. "Firm-Specific Human Capital and Promotion Ladders," Working Papers, Queen's University, Department of Economics 452, Queen's University, Department of Economics.
  7. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 447-80, March.
  8. Truman F. Bewley, 1999. "Work Motivation," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1209, Cowles Foundation for Research in Economics, Yale University.
  9. Agell, J. & Lundborg, P., 1999. "Survey Evidence on Wage Rigidity and Unemployment: Sweden in the 1990s," Papers, Uppsala - Working Paper Series 1999:12, Uppsala - Working Paper Series.
  10. Louis N. Christofides & Thanasis Stengos, 2003. "Wage Rigidity in Canadian Collective Bargaining Agreements ," University of Cyprus Working Papers in Economics, University of Cyprus Department of Economics 1-2003, University of Cyprus Department of Economics.
  11. Jonathan P. Thomas, 2005. "Fair pay and a Wage-Bill Argument for low Real Wage Cyclicality and Excessive Employment Variability," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(506), pages 833-859, October.
  12. Truman Bewley, 1999. "Work motivation," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 35-49.
  13. Carruth, Alan A & Oswald, Andrew J, 1987. "On Union Preferences and Labour Market Models: Insiders and Outsi ders," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(386), pages 431-45, June.
  14. McDonald, J.T. & Worswick, C., 1997. "Wages, Implicit Contracts and the Business Cycle: Evidence from Canadian Micro Data," Department of Economics - Working Papers Series, The University of Melbourne 588, The University of Melbourne.
  15. Devereux, Paul J. & Hart, Robert A., 2005. "The Spot Market Matters: Evidence on Implicit Contracts from Britain," IZA Discussion Papers 1497, Institute for the Study of Labor (IZA).
  16. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc.
  17. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(4), pages 665-88, August.
  18. Holmstrom, Bengt, 1983. "Equilibrium Long-Term Labor Contracts," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(3), pages 23-54, Supplemen.
  19. John Moore, 2007. "Stable Sets And Steady Wages," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 54(5), pages 721-730, November.
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Citations

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Cited by:
  1. Menzio, Guido & Moen, Espen R, 2008. "Worker Replacement," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7075, C.E.P.R. Discussion Papers.
  2. Jonathan Thomas & TIm Worrall, 2007. "Limited Commitment Models of the Labour Market," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 176, Edinburgh School of Economics, University of Edinburgh.
  3. Pedro S. Martins & Gary Solon & Jonathan Thomas, 2010. "Measuring What Employers Really Do about Entry Wages over the Business Cycle," NBER Working Papers 15767, National Bureau of Economic Research, Inc.
  4. Jonathan Thomas & Andy Snell, . " Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting," CDMA Conference Paper Series, Centre for Dynamic Macroeconomic Analysis 0708, Centre for Dynamic Macroeconomic Analysis.
  5. Martins, Pedro S. & Snell, Andy & Thomas, Jonathan P., 2009. "Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting," IZA Discussion Papers 4346, Institute for the Study of Labor (IZA).

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