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Unemployment Benefits, Contract Length and Nominal Wage Flexibility

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  • Lars Calmfors
  • Åsa Johansson
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    Abstract

    We show in a union-bargaining model that a decrease in the unemployment benefit level increases not only equilibrium employment, but also nominal wage flexibility, and thus reduces employment variations in the case of nominal shocks. Long-term wage contracts lead to highter expected real wages and hence higher expected unemployment than short-term contracts. Therefore lower benefits reduce the expected utility gross of contract costs of a union member more with long-term than with short-term contracts and thus create an incentive for shorter contracts. Incentives for employers work in the same direction. Lower taxes associated with lower benefits also tend to make short-term contracts more attractive.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-06/cesifo_wp514.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 514.

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    Date of creation: 2001
    Date of revision:
    Handle: RePEc:ces:ceswps:_514

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    Related research

    Keywords: Nominal wage flexibility; contracts length; macroeconomic fluctuations; unemployment benefits;

    References

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    1. Bacchetta, Philippe & van Wincoop, Eric, 1998. "Does Exchange Rate Stability Increase Trade and Capital Flows?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1962, C.E.P.R. Discussion Papers.
    2. Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," Papers, Uppsala - Working Paper Series 1997-25, Uppsala - Working Paper Series.
    3. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
    4. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers, Centre for Economic Performance, LSE dp0407, Centre for Economic Performance, LSE.
    5. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
    6. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, American Economic Association, vol. 71(5), pages 896-908, December.
    7. Ball, Laurence Markham, 1987. "Externalities from Contract Length," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 615-29, September.
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    Cited by:
    1. Pasquale Commendatore & Ingrid Kubin, 2005. "Dynamic Effects of Regulation and Deregulation in Goods and Labour Markets," Working Papers, Vienna University of Economics Research Group: Growth and Employment in Europe: Sustainability and Competitiveness geewp49, Vienna University of Economics Research Group: Growth and Employment in Europe: Sustainability and Competitiveness.
    2. Pasquale Commedatore & Ingrid Kubin, 2003. "The dynamics of wages and employment in a model of monopolistic competition and efficient bargaining," Department of Economics Working Papers wuwp085, Vienna University of Economics, Department of Economics.

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