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Wage Flexibility in Ongoing Employment Relations - An Experiment with a Stochastic Labor Market -

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  • Siegfried K. Berninghaus

    ()
    (Institut fuer Wirtschaftstheorie und Operations Research, University of Karlsruhe)

  • Sabrina Bleich

    (Institut fuer Wirtschaftstheorie und Operations Research, University of Karlsruhe)

  • Werner Gueth

    ()
    (Max Planck Institute of Economics, Jena, Germany)

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    Abstract

    Facing a stochastic market wage, which is independent of their own hiring policy, employers offer contracts specifying ï¬xed wage, revenue share and employment duration. In ongoing employment relations it depends on the treatment whether ï¬xed wages can be only increased or also decreased. Will the uncertainty of the future market wage and less wage flexibility lead to temporary employment? And, if not, will employers adjust wages to changing market wages and will workers in ongoing employment relations react to wage decreases via effort choices? Our results partly question empirical claims, e.g. of Bewley (1995), and conï¬rm the tendency to establish ongoing employment relations. Granting more wage flexibility to employers altogether questions rather than enhances effciency since it induces opportunistic wage cuts to which employees react with lower efforts.

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    Bibliographic Info

    Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2007-072.

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    Date of creation: 10 Oct 2007
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    Handle: RePEc:jrp:jrpwrp:2007-072

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    Keywords: noncooperative game; labor contracts; labor market flexibility; principal-agent theory; experimental economics;

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