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Nominal Wage Contracts, Aggregate and Firm-Specific Uncertainty - How High Is the Private Gain From Indexation?

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Author Info
Laseen, S.

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Abstract

In this paper I investigate to what extent firm-specific uncertainty affects the gain from indexation. Earlier studies have tried to explain wage rigidity by arguing that insiders face little layoff risk due to employment fluctuations caused by aggregate shocks. However, this analysis abstracts from idiosyncratic risk and this seems hard to reconcile with recent microeconomic evidence which shows that firm-specific uncertainty explains a large part of establishments' employment changes. By numerically solving an insider-outsider model I show that the introduction of firm-specific uncertainty increases the gain from indexation considerably (from 0 to 1.5 percent of the wage). It is not evident that the gain from indexation is small enough to support an equilibrium with a constant nominal wage. According to the model, nominal wage contracts should be more prevalent, when layoff is not so costly for the worker, due to high unemployment benefits or short duration of unemployment spells.

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Publisher Info
Paper provided by Uppsala - Working Paper Series in its series Papers with number 2000:11.

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Length: 38 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:uppaal:2000:11

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Related research
Keywords: WAGES ; INDEXATION ; CONTRACTS ; JOB SECURITY;

Other versions of this item:

Find related papers by JEL classification:
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs

References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December. [Downloadable!] (restricted)
  3. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 37-50, January. [Downloadable!] (restricted)
  5. Davis, Steven J. & Haltiwanger, John, 1999. "Gross job flows," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 41, pages 2711-2805 Elsevier. [Downloadable!] (restricted)
  6. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp.. [Downloadable!] (restricted)
  7. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December. [Downloadable!] (restricted)
  8. Prakash Loungani & Bharat Trehan, 1997. "Job creation and destruction," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue May 2. [Downloadable!]
  9. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932.
  10. George A. Akerlof & Andrew K. Rose & Janet L. Yellen, 1988. "Job Switching and Job Satisfaction in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-2), pages 495-594. [Downloadable!]
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