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Preferences for Rigid versus Individualized Wage Setting in Search Economies with Frictions

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  • Boeri, Tito

    ()
    (Bocconi University)

  • Burda, Michael C.

    ()
    (Humboldt University Berlin)

Abstract

Firing frictions and renegotiation costs affect worker and firm preferences for rigid wages versus individualized Nash bargaining in a standard model of equilibrium unemployment, in which workers vary by observable skill. Rigid wages permit savings on renegotiation costs and prevent workers from exploiting the firing friction. For standard calibrations, the model can account for political support for wage rigidity by both workers and firms, especially in labor markets for intermediate skills. The firing friction is necessary for this effect, and reinforces the impact of both turbulence and other labor market institutions on preferences for rigid wages.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1133.

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Length: 37 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1133

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Keywords: firing taxes; renegotiation costs; job protection; wage rigidities; equilibrium unemployment;

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References

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  1. Olivier Blanchard & Francesco Giavazzi, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," NBER Working Papers 8120, National Bureau of Economic Research, Inc.
  2. Tito Boeri & Giuseppe Nicoletti & Stefano Scarpetta, . "Regulation and Labour Market Performance," Working Papers 158, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers dp0470, Centre for Economic Performance, LSE.
  4. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  5. Garibaldi, Pietro & Violante, Giovanni L, 2004. "The Employment Effects of Severance Payments with Wage Rigidities," CEPR Discussion Papers 4608, C.E.P.R. Discussion Papers.
  6. Bertola, Giuseppe & Rogerson, Richard, 1997. "Institutions and labor reallocation," European Economic Review, Elsevier, vol. 41(6), pages 1147-1171, June.
  7. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(482), pages 829-853, October.
  8. Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "The Regulation of Entry," Working Paper 19462, Harvard University OpenScholar.
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  11. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  12. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198293323, October.
  13. Mortensen, Dale T & Pissarides, Christopher A, 1999. "Unemployment Responses to 'Skill-Biased' Technology Shocks: The Role of Labour Market Policy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(455), pages 242-65, April.
  14. Ljungqvist, Lars & Sargent, Thomas J, 2002. "The European Employment Experience," CEPR Discussion Papers 3543, C.E.P.R. Discussion Papers.
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  16. Burda, Michael C, 1992. " A Note on Firing Costs and Severance Benefits in Equilibrium Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(3), pages 479-89.
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Cited by:
  1. Christoffel, Kai & Linzert, Tobias, 2006. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Discussion Paper Series 1: Economic Studies 2006,11, Deutsche Bundesbank, Research Centre.
  2. Brügemann, Björn, 2006. "Does Employment Protection Create Its Own Political Support?," IZA Discussion Papers 2286, Institute for the Study of Labor (IZA).
  3. Nikolaj Malchow-Møller & James Markusen & Jan Skaksen, 2010. "Labour market institutions, learning and self-employment," Small Business Economics, Springer, vol. 35(1), pages 35-52, July.
  4. Pierre, Gaëlle & Scarpetta, Stefano, 2004. "Employment Regulations through the Eyes of Employers: Do They Matter and How Do Firms Respond to Them?," IZA Discussion Papers 1424, Institute for the Study of Labor (IZA).

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