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Unemployment and Within-Group Wage Inequality: Can Information Explain the Trade-Off?

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  • Renato Faccini

Abstract

In Italy, following WWII, specific hiring procedures were developed that prevented firms from screening workers. More in particular, these institutions characterized the Italian labor market with respect to the US labor market, and were gradually removed during the 1990s. A simple matching model in which the usual Nash bargaining criterion is replaced by a game of incomplete information, shows that such hiring procedures endogenously generate wage compression within groups of observationally equivalent workers, as well as higher unemployment rates. Both the estimated behavior of within-group wage inequality in Italy, computed from the micro-data of the SHIW panel of the Bank of Italy, and the behavior of the unemployment rate in the late 1990s, are consistent with the predictions of the model.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2007/14.

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Date of creation: 2007
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Handle: RePEc:eui:euiwps:eco2007/14

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Keywords: job-search; labor market institutions; within-group wage inequality; bargaining with incomplete information; screening;

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  1. Strand, Jon, 2000. "Wage bargaining and turnover costs with heterogeneous labor and asymmetric information1," Labour Economics, Elsevier, vol. 7(1), pages 95-116, January.
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  14. Susan N. Houseman, 2001. "Why employers use flexible staffing arrangements: Evidence from an establishment survey," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 55(1), pages 149-170, October.
  15. Andrea Ichino & Fabrizia Mealli & Tommaso Nannicini, 2005. "Temporary Work Agencies in Italy: A Springboard Toward Permanent Employment?," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(1), pages 1-27, September.
  16. Blau, Francine D. & Kahn, Lawrence M., 1999. "Institutions and laws in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 25, pages 1399-1461 Elsevier.
  17. Montgomery, James D, 1999. "Adverse Selection and Employment Cycles," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 281-97, April.
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