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Wage/Tenure Contracts with Heterogeneous Firms

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  • Melvyn Coles

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  • Ken Burdett

Abstract

This paper investigates equilibria in a labor market where heterogeneous firms post wage/tenure contracts and risk-averse workers, both employed and unemployed, search for new job opportunities. Different firms, even those with the same productivity, typically offer different contracts. Equilibrium finds workers never quit from higher productivity firms to lower productivity firms, but turnover is inefficiently low as employees with large tenures at low productivity firms may reject job offers from more productive firms. A worker who quits to a more productive firm may take a wage cut in anticipation of better wage promotion prospects. Wages within a firm might also increase by a discrete amount at the end of an initial "probationary" spell.

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Bibliographic Info

Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 649.

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Date of creation: 12 Nov 2007
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Handle: RePEc:esx:essedp:649

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  1. Iourii Manovskii & Gueorgui Kambourov, 2004. "Occupational Specificity of Human Capital," 2004 Meeting Papers 197, Society for Economic Dynamics.
  2. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High Wage Workers and High Wage Firms," NBER Working Papers 4917, National Bureau of Economic Research, Inc.
  3. Joseph G. Altonji & Nicolas Williams, 1992. "The Effects of Labor Market Experience, Job Seniority, and Job Mobility on Wage Growth," NBER Working Papers 4133, National Bureau of Economic Research, Inc.
  4. Margaret Stevens, 2004. "Wage-Tenure Contracts in a Frictional Labour Market: Firms' Strategies for Recruitment and Retention," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 535-551, 04.
  5. Albrecht, James W & Axell, Bo, 1984. "An Equilibrium Model of Search Unemployment," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 824-40, October.
  6. Katharine G. Abraham & Henry S. Farber, 1986. "Job Duration, Seniority and Earnings," Working papers 407, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Bontemps, Christian & Robin, Jean-Marc & Van den Berg, Gerard J, 1999. "An Empirical Equilibrium Job Search Model with Search on the Job and Heterogeneous Workers and Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 1039-74, November.
  8. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, 03.
  9. Giuseppe Moscarini, 2005. "Job Matching and the Wage Distribution," Econometrica, Econometric Society, vol. 73(2), pages 481-516, 03.
  10. Joseph G. Altonji & Nicolas Williams, 2005. "Do wages rise with job seniority? A reassessment," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(3), pages 370-397, April.
  11. Ken Burdett & Melvyn Coles, 2003. "Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 71(5), pages 1377-1404, 09.
  12. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521337465.
  13. Jovanovic, Boyan, 1984. "Matching, Turnover, and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 108-22, February.
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Cited by:
  1. Carrillo-Tudela, Carlos & Smith, Eric, 2009. "Wage Dispersion and Wage Dynamics Within and Across Firms," IZA Discussion Papers 4031, Institute for the Study of Labor (IZA).
  2. Moscarini, Giuseppe & Wright, Randall, 2010. "Introduction to Search Theory and Applications," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1319-1324, July.
  3. Rasmus Lentz, 2014. "Optimal Employment Contracts with Hidden Search," NBER Working Papers 19988, National Bureau of Economic Research, Inc.
  4. Xiao, Chaoqun & Tang, Wansheng & Zhao, Ruiqing & Zhou, Chi, 2013. "Equilibrium search with heterogeneous firms, workers and endogenous human capital," MPRA Paper 52136, University Library of Munich, Germany.
  5. Amanda Gosling & Mathan Satchi, 2014. "Separation incentives and minimum wages in a job-posting search framework," Studies in Economics 1401, Department of Economics, University of Kent.

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