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Can Insider Power Affect Employment?

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  • Diaz-Vazquez, Pilar
  • Snower, Dennis J.

Abstract

Do firms reduce employment when their insiders (established, incumbent employees) claim higher wages? The conventional answer in the theoretical literature is that insider power has no influence on employment, provided that the newly hired employees (entrants) receive their reservation wages. The reason given is that an increase in insider wages gives rise to a counterveiling fall in reservation wages, leaving the present value of wage costs unchanged. Our analysis contradicts this conventional answer. We show that, in the context of a stochastic model of the labor market, an increase in insider wages promotes firing in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3472.

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Date of creation: Jul 2002
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Handle: RePEc:cpr:ceprdp:3472

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Keywords: business cycles; employment; hiring and firing costs; insiders; wages;

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References

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  1. Manzini, Paola & Snower, Dennis J., 1996. "On the Foundations of Wage Bargaining," CEPR Discussion Papers 1514, C.E.P.R. Discussion Papers.
  2. Gottfries, N. & Sjostrom, Y., 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Papers 1998-10, Uppsala - Working Paper Series.
  3. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  4. Fehr, Ernst & Kirchsteiger, Georg, 1994. "Insider Power, Wage Discrimination and Fairness," Economic Journal, Royal Economic Society, vol. 104(424), pages 571-83, May.
  5. Vetter, Henrik & Andersen, Torben M, 1994. "Do Turnover Costs Protect Insiders?," Economic Journal, Royal Economic Society, vol. 104(422), pages 124-30, January.
  6. Frank, Jeff & Malcomson, James M., 1994. "Trade unions and seniority employment rules," European Economic Review, Elsevier, vol. 38(8), pages 1595-1611, October.
  7. Burda, Michael C, 1992. " A Note on Firing Costs and Severance Benefits in Equilibrium Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(3), pages 479-89.
  8. repec:fth:exetec:96/16 is not listed on IDEAS
  9. Frank, Jeff, 1985. "Trade Union Efficiency and Overemployment with Seniority Wage Scales," Economic Journal, Royal Economic Society, vol. 95(380), pages 1021-34, December.
  10. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
  11. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
  12. Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "On-the-Job Training and the Effects of Insider Power," IZA Discussion Papers 586, Institute for the Study of Labor (IZA).
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Citations

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Cited by:
  1. Chen, Yu-Fu & Funke, Michael, 2008. "Product market competition, investment and employment-abundant versus job-poor growth: A real options perspective," European Journal of Political Economy, Elsevier, vol. 24(1), pages 218-238, March.
  2. Brown, Alessio J G & Merkl, Christian & Snower, Dennis J., 2009. "An Incentive Theory of Matching," CEPR Discussion Papers 7283, C.E.P.R. Discussion Papers.
  3. Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "On-the-Job Training and the Effects of Insider Power," IZA Discussion Papers 586, Institute for the Study of Labor (IZA).
  4. Jo Seldeslachts, 2002. "Interactions Between Product and Labour Market Reforms," UFAE and IAE Working Papers 519.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Diaz-Vazquez, Pilar & Snower, Dennis J., 2003. "On-the-Job Training, Firing Costs and Employment," IZA Discussion Papers 910, Institute for the Study of Labor (IZA).
  6. Diaz-Vazquez, Pilar & Snower, Dennis, 2006. "On-the-Job Learning and the Effects of Insider Power," Labour Economics, Elsevier, vol. 13(3), pages 317-341, June.

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