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The Advantage of Employing Workers With Short Time Perspectives

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  • Burkle, Thomas
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    Abstract

    This paper examines labor contracts as a form of insurance contracts. It assumes that workers are risk averse with the time perspective (or planning period) of a worker combining a period of T distinct spells t, with length of a spell being the same for all workers (a spell might be a year for example). Workers are assumed to differ only according to their time perspective: For example some workers planning period may consist of only one spell (T=1), while for others it may be three spells (T=3). The analysis starts with the assumption that workers are hired on a neoclassical spot contract at the beginning of each spell . Then it shows that, if workers objective is to maximize the sum of their incomes over all spells in their planing period, income risk that derives from the uncertainty of employment caused by stochastical business cycles in each spell will be more threatening to workers with a shorter time perspective T than to those with a longer time perspective. Therefore, if a firm offers an institutionalized contract that bears no employment risk and covers the worker´s individual planning period T, the worker´s willingness to pay risk premiums by wage concessions decreases, the longer is his planning period. On this pure risk theoretical point of view, the firm will prefer workers with short individual planning periods in order to maximize their insurance premiums. Thus this paper contradicts the common argument that long term contracts are advantageous to firms.

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    Bibliographic Info

    Paper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt6pg5q88n.

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    Date of creation: 01 Jun 2003
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    Handle: RePEc:cdl:indrel:qt6pg5q88n

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    1. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
    2. Taylor, Mark P, 1987. "The Simple Analytics of Implicit Labour Contracts," Bulletin of Economic Research, Wiley Blackwell, vol. 39(1), pages 1-27, January.
    3. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
    4. Azariadis, Costas & Stiglitz, Joseph E, 1983. "Implicit Contracts and Fixed Price Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 1-22, Supplemen.
    5. Drew Fudenberg & Bengt Holmstrom & Paul Milgrom, 1987. "Short-Term Contracts and Long-Term Agency Relationships," Working papers 468, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
    7. Rey, Patrick & Salanie, Bernard, 1990. "Long-term, Short-term and Renegotiation: On the Value of Commitment in Contracting," Econometrica, Econometric Society, vol. 58(3), pages 597-619, May.
    8. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
    9. Kihlstrom, Richard E. & Mirman, Leonard J., 1974. "Risk aversion with many commodities," Journal of Economic Theory, Elsevier, vol. 8(3), pages 361-388, July.
    10. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    11. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
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