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Limited Commitment Models of the Labour Market

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  • Jonathan Thomas
  • Tim Worrall

Abstract

We present an overview of models of long-term self-enforcing labor contracts in which risk sharing is the dominant motive for contractual solutions. A base model is developed which is sufficiently general to encompass the two-agent problem central to most of the literature, including variable hours. We consider two-sided limited commitment and look at its implications for aggregate labor market variables. We consider the implications for empirical testing and the available empirical evidence. We also consider the one-sided limited commitment problem for which there exists a considerable amount of empirical support.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-10/cesifo1_wp2109.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2109.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2109

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Keywords: labor contracts; self-enforcing contracts; unemployment; business cycle;

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References

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  1. Andy Snell & Jonathan Thomas, 2006. "Labor Contracts, Equal Treatment and Wage-Unemployment Dynamics," CESifo Working Paper Series 1835, CESifo Group Munich.
  2. Paul J. Devereux, 2001. "The Cyclicality of real wages within employer-employee matches," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 54(4), pages 835-850, July.
  3. Christian Sigouin, 2000. "Self-enforcing Employment Contracts and Business Cycle Fluctuations," Cahiers de recherche CREFE / CREFE Working Papers 127, CREFE, Université du Québec à Montréal.
  4. Dirk Krueger & Harald Uhlig, 2005. "Competitive Risk Sharing Contracts with One-Sided Commitment," SFB 649 Discussion Papers SFB649DP2005-003, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Leena Rudanko, 2008. "Labor Market Dynamics under Long Term Wage Contracting," Boston University - Department of Economics - Working Papers Series wp2008-003, Boston University - Department of Economics.
  6. Gauthier, Celine & Poitevin, Michel & Gonzalez, Patrick, 1997. "Ex Ante Payments in Self-Enforcing Risk-Sharing Contracts," Journal of Economic Theory, Elsevier, vol. 76(1), pages 106-144, September.
  7. Claudio Michelacci & Vincenzo Quadrini, 2005. "Financial Markets and Wages," NBER Working Papers 11050, National Bureau of Economic Research, Inc.
  8. Dubois, P. & Jullien, B. & Magnac, T., 2006. "Formal and informal risk sharing in LDCs : theory and empirical evidence," Economics Working Paper Archive (Toulouse) 200608, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse).
  9. Solon, Gary & Barsky, Robert & Parker, Jonathan A, 1994. "Measuring the Cyclicality of Real Wages: How Important Is Composition Bias?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 1-25, February.
  10. 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.
  11. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-75, September.
  12. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
  13. Christian Calmès, 2007. "Self-Enforcing Labour Contracts and Macroeconomic Dynamics," International Advances in Economic Research, Springer, vol. 13(2), pages 200-213, May.
  14. John M. Abowd & David Card, 1986. "Intertemporal Labor Supply and Long Term Employment Contracts," NBER Working Papers 1831, National Bureau of Economic Research, Inc.
  15. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  16. Darren Grant, 2003. "The effect of implicit contracts on the movement of wages over the business cycle: Evidence from the national longitudinal surveys," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(3), pages 393-408, April.
  17. 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.
  18. Michele Boldrin & Michael Horvath, 1994. "Labor Contracts and Business Cycles," Discussion Papers 1068, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  20. Shin, Donggyun, 1994. "Cyclicality of real wages among young men," Economics Letters, Elsevier, vol. 46(2), pages 137-142, October.
  21. Sigouin, Christian, 2004. "Self-enforcing employment contracts and business cycle fluctuations," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 339-373, March.
  22. Malcomson, James M., 1999. "Individual employment contracts," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 35, pages 2291-2372 Elsevier.
  23. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  24. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 1998. "Mutual Insurance, Individual Savings and Limited Commitment," Keele Department of Economics Discussion Papers (1995-2001) 98/14, Department of Economics, Keele University.
  25. Haltiwanger, John & Waldman, Michael, 1986. "Insurance and Labor Market Contracting: An Analysis of the Capital Market Assumption," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 355-75, July.
  26. Beaudry, Paul & DiNardo, John, 1995. "Is the Behavior of Hours Worked Consistent with Implicit Contract Theory?," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 743-68, August.
  27. 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.
  28. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
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Cited by:
  1. Leena Rudanko, 2005. "Labor Market Dynamics under Long Term Wage Contracting," 2005 Meeting Papers 876, Society for Economic Dynamics.
  2. Pratap, Sangeeta & Quintin, Erwan, 2011. "Financial crises and labor market turbulence," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 601-615.
  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).

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