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Labor Contracts, Equal Treatment and Wage-Unemployment Dynamics

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  • Andy Snell
  • Jonathan Thomas

Abstract

This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics and unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labour market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match actual unemployment and wage series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-10/cesifo1_wp1835.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1835.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1835

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Keywords: labour contracts; business cycle; unemployment; equal treatment; cohort effects;

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  1. 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.
  2. 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.
  3. 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.
  4. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(2), pages 154-169, March.
  5. Jonas Agell & Per Lundborg, 2003. "Survey Evidence on Wage Rigidity and Unemployment: Sweden in the 1990s," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 105(1), pages 15-30, 03.
  6. 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.
  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. John Moore, 2007. "Stable Sets And Steady Wages," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 721-730, November.
  9. 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.
  10. 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.
  11. James Ted McDonald & Christopher Worswick, 1999. "Wages, Implicit Contracts, and the Business Cycle: Evidence from Canadian Micro Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(4), pages 884-913, August.
  12. Holmstrom, Bengt, 1983. "Equilibrium Long-Term Labor Contracts," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(3), pages 23-54, Supplemen.
  13. Truman Bewley, 1999. "Work motivation," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 35-49.
  14. 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.
  15. Paul J. Devereux & Robert A. Hart, 2007. "The Spot Market Matters: Evidence On Implicit Contracts From Britain," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 661-683, November.
  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. 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.
  18. 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.
  19. Gottfries, Nils & Sjostrom, Tomas, 2000. " Insider Bargaining Power, Starting Wages and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 102(4), pages 669-88, December.
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Citations

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Cited by:
  1. Jonathan Thomas & Tim Worrall, 2007. "Limited Commitment Models of the Labour Market," CESifo Working Paper Series 2109, CESifo Group Munich.
  2. Menzio, Guido & Moen, Espen R., 2010. "Worker replacement," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(6), pages 623-636, September.
  3. Martins, Pedro S. & Solon, Gary & Thomas, Jonathan P., 2010. "Measuring What Employers Really Do about Entry Wages over the Business Cycle," IZA Discussion Papers 4757, Institute for the Study of Labor (IZA).
  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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