Nominal Wage Contracts, Aggregate and Firm-Specific Uncertainty – How High is the Private Gain from Indexation?
AbstractIn 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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Bibliographic InfoPaper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2000:11.
Length: 46 pages
Date of creation: 06 Sep 2000
Date of revision:
Publication status: Published in Scandinavian Journal of Economics, 2003, pages 247-254.
Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
More information through EDIRC
Indexation; Wage contracts; Insider-outsider models;
Other versions of this item:
- Laseen, S., 2000. "Nominal Wage Contracts, Aggregate and Firm-Specific Uncertainty - How High Is the Private Gain From Indexation?," Papers 2000:11, Uppsala - Working Paper Series.
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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