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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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.98
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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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References

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  1. 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).
  2. Truman Bewley, 1999. "Work motivation," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-49.
  3. Agell, Jonas & Lundborg, Per, 1999. "Survey evidence on wage rigidity and unemployment: Sweden in the 1990s," Working Paper Series 1999:2, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  4. Gottfries, N. & Sjostrom, Y., 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Papers 1998-10, Uppsala - Working Paper Series.
  5. Bengt Holmstrom, 1980. "Equilibrium Long-Term Labor Contracts," Discussion Papers 414R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Lorne Carmichael, 1983. "Firm-Specific Human Capital and Promotion Ladders," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 251-258, Spring.
  7. Louis N. Christofides & Thanasis Stengos, 2003. "Wage rigidity in Canadian collective bargaining agreements," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(3), pages 429-448, April.
  8. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
  9. Donggyun Shin & Kwanho Shin, 2003. "Why Are The Wages of Job Stayers Procyclical?," ISER Discussion Paper 0573, Institute of Social and Economic Research, Osaka University.
  10. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
  11. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 252-70, April.
  12. 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.
  13. 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, vol. 99(4), pages 665-88, August.
  14. John Moore, 2007. "Stable Sets And Steady Wages," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 721-730, November.
  15. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
  16. Carruth, Alan A & Oswald, Andrew J, 1987. "On Union Preferences and Labour Market Models: Insiders and Outsi ders," Economic Journal, Royal Economic Society, vol. 97(386), pages 431-45, June.
  17. Truman F. Bewley, 1999. "Work Motivation," Cowles Foundation Discussion Papers 1209, Cowles Foundation for Research in Economics, Yale University.
  18. 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, vol. 115(506), pages 833-859, October.
  19. McDonald, J.T. & Worswick, C., 1997. "Wages, Implicit Contracts and the Business Cycle: Evidence from Canadian Micro Data," Department of Economics - Working Papers Series 588, The University of Melbourne.
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Citations

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Cited by:
  1. Jonathan P. Thomas & Tim Worrall, 2007. "Limited Commitment Models Of The Labour Market," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 750-773, November.
  2. 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.
  3. Guido Menzio & Espen R. Moen, 2010. "Worker replacement," NBER Working Papers 15983, National Bureau of Economic Research, Inc.
  4. 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).
  5. Jonathan Thomas & Andy Snell, . " Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting," CDMA Conference Paper Series 0708, Centre for Dynamic Macroeconomic Analysis.

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