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Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard

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  • Costain, James

    ()
    (Bank of Spain)

  • Jansen, Marcel

    ()
    (Universidad Autónoma de Madrid)

Abstract

This paper studies the cyclical dynamics of Mortensen and Pissarides' (1994) model of job creation and destruction when workers' effort is not perfectly observable, as in Shapiro and Stiglitz (1984). An occasionally-binding no-shirking constraint truncates the real wage distribution from below, making firms' share of surplus weakly procyclical, and may thus amplify fluctuations in hiring. It may also cause a burst of inefficient firing at the onset of a recession, separating matches that no longer have sufficient surplus for incentive compatibility. On the other hand, since marginal workers in booms know firms cannot commit to keep them in recessions, they place little value on their jobs and are expensive to motivate. For a realistic calibration, this last effect is by far the strongest; even a moderate degree of moral hazard can eliminate all fluctuation in the separation rate. This casts doubt on Ramey and Watson's (1997) "contractual fragility" mechanism, and means worker moral hazard only makes the "unemployment volatility puzzle" worse. However, moral hazard has potential to explain other labor market facts, because it is consistent with small but clearly countercyclical fluctuations in separation rates, and a robust Beveridge curve.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4344.

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Length: 45 pages
Date of creation: Aug 2009
Date of revision:
Publication status: published in: Scandinavian Journal of Economics, special issue: "Price and Wage Dynamics", 2010, 112(4), 782-811
Handle: RePEc:iza:izadps:dp4344

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Related research

Keywords: endogenous separation; efficiency wages; shirking; job matching; contractual fragility;

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References

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Citations

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Cited by:
  1. repec:ebl:ecbull:v:10:y:2008:i:1:p:1-10 is not listed on IDEAS
  2. Abbritti, Mirko & Fahr, Stephan, 2011. "Macroeconomic implications of downward wage rigidities," Working Paper Series 1321, European Central Bank.
  3. Kfir Eliaz & Rani Spiegler, 2013. "Reference-Dependence and Labor-Market Fluctuations," NBER Working Papers 19085, National Bureau of Economic Research, Inc.
  4. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, Elsevier.
  5. Katarzyna Budnik, 2012. "Do those who stay work less? On the impact of emigration on the measured TFP in Poland," National Bank of Poland Working Papers 113, National Bank of Poland, Economic Institute.
  6. Norikazu Tawara, 2008. "No-shirking Conditions in Frictional Labor Markets," Economics Bulletin, AccessEcon, vol. 10(1), pages 1-10.
  7. Kangwoo Park, 2007. "Labor-Market Implications of Contracts under Moral Hazard," 2007 Meeting Papers 277, Society for Economic Dynamics.

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