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Self-Enforcing Labour Contracts and the Dynamics Puzzle

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Author Info
Christian Calmès

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Abstract

To properly account for the dynamics of key macroeconomic variables, researchers incorporate various internal-propagation mechanisms in their models. In general, these mechanisms implicitly rely on the assumption of a perfect equality between the real wage and the marginal product of labour. The author proposes a theoretical validation of a micro-founded internal-propagation mechanism: he builds a model that features a limited-commitment economy, and derives endogenous self-enforcing labour contracts that produce a different linkage between the real wage and the marginal product of labour. The risk-sharing between the entrepreneur and the worker, both faced with enforcement problems, provides an admissible explanation of the prolonged comovements observed between consumption and labour. Since these co-movements are at the core of the persistence of the impulse response of output to exogenous technology shocks, this persistence can, in turn, be rationalized with the endogenous real rigidity emerging from the economy. The author shows that, in this framework, the persistence ultimately depends on the initial bargaining power and the magnitude of the risk-sharing.

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Paper provided by Bank of Canada in its series Working Papers with number 05-1.

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Length: 42 pages
Date of creation: 2005
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Handle: RePEc:bca:bocawp:05-1

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Related research
Keywords: Business fluctuations and cycles Economic models Labour markets

Find related papers by JEL classification:
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
E49 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Other
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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