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Taxes, Risk Aversion and Unemployment Insurance as Causes of Wage Rigidity

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  • Lundborg, Per

    (Trade Union Institute for Economic Research)

Abstract

Recent empirical evidence has shown that nominal wages are more rigid among blue-collar (low income) workers than among white-collar (high income) workers. We show theoretically that employees in crisis-ridden firms will reject wage cut proposals that save jobs if risk aversion is great, replacement rates high and marginal taxes low. These factors for can explain why wage rigidity is less intense among high-income earners than among low-income earners. We argue, that with economic growth nominal wages should become more flexible, since marginal taxes increase, the marginal utility of income drops, normally, replacement rates fall.

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Bibliographic Info

Paper provided by Trade Union Institute for Economic Research in its series Working Paper Series with number 160.

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Length: 16 pages
Date of creation: 25 May 2000
Date of revision:
Handle: RePEc:hhs:fiefwp:0160

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Keywords: Wage rigidity; Marginal taxes; Risk aversion; Unemployment;

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  1. Hanes, Christopher, 1992. "The Development of Nominal Wage Rigidity in Nineteenth-Century America," The Journal of Economic History, Cambridge University Press, vol. 52(02), pages 454-456, June.
  2. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, vol. 85(2), pages 250-54, May.
  3. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, vol. 38(5), pages 1021-1039, May.
  4. Campbell, Carl M, III & Kamlani, Kunal S, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 759-89, August.
  5. Blinder, Alan S & Choi, Don H, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1003-15, November.
  6. Agell, Jonas & Lundborg, Per, 1995. " Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 295-307, June.
  7. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
  8. O'Brien, Anthony Patrick, 1989. "A Behavioral Explanation for Nominal Wage Rigidity during the Great Depression," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 719-35, November.
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Cited by:
  1. Strauss, Tove, 2000. "Structural Reforms, Uncertainty, and Private Investment," Working Paper Series 165, Trade Union Institute for Economic Research.
  2. Arai, Mahmood & Thoursie, Peter Skogman, 2005. "Incentives and selection in cyclical absenteeism," Labour Economics, Elsevier, vol. 12(2), pages 269-280, April.
  3. Strauss, Tove, 2000. "Economic Reforms and the Poor," Working Paper Series 164, Trade Union Institute for Economic Research.

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