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Optimal Labor Contracts May Exhibit Wage Fluctuations Due to Wage Discrimination

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Author Info

  • Hans Jørgen Jacobsen

    (Institute of Economics, University of Copenhagen)

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

Abstract

Consider a labor market where the parties are able to write contracts contingent on the state of demand and productivity. If it is realistically assumed that the workers differ wrt. their reservation wages, then it becomes a natural presumption that firms on the market will offer several alternative contracts instead of just one and let workers choose between them. This may give a gain from wage discrimination. In a specific model of a labor market with one firm and two types of workers we show that it is indeed optimal for the firm to offer two different contracts. Further, we state plausible conditions in terms of the workers' attitudes towards risk which imply that optimal pairs of contracts feature wage fluctuations over the cycle on one of the contracts. This result is somewhat in contrast to a standard (interpretation of a) result from the theory of labor contracts.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 94-11.

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Length: 22 pages
Date of creation: Sep 1994
Date of revision:
Handle: RePEc:kud:kuiedp:9411

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