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Wage Flexibility and Contract Structure in Germany

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  • VILHUBERT, Lars
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    Abstract

    In this paper, we look at how labor market conditions at different points during the tenure of individuals with firms are correlated with current earnings. Using data on individuals from the German Socioeconomic Panel for the 1985-1994 period, we find that both the contemporaneous unemployment rate and prior values of the unemployment rate are significantly correlated with current earnings, contrary to results for the American labor market. Estimated elasticities vary between 9 and 15 percent for the elasticity of earnings with respect to current unemployment rates, and between 6 and 10 percent with respect to unemployment rates at the start of current firm tenure. Moreover, whereas local unemployment rates determine levels of earnings, national rates influence contemporaneous variations in earnings. We interpret this result as evidence that German unions do, in fact, bargain over wages and employment, but that models of individualistic contracts, such as the implicit contract model, may explain some of the observed wage drift and longer-term wage movements reasonably well. Furthermore, we explore the heterogeneity of contracts over a variety of worker and job characteristics. In particular, we find evidence that contracts differ across firm size and worker type. Workers of large firms are remarkably more insulated from the job market than workers for any other type of firm, indicating the importance of internal job markets.

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    File URL: http://hdl.handle.net/1866/472
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    Bibliographic Info

    Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 9905.

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    Length: 39 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:mtl:montde:9905

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    Keywords: wage curve; imicit contracts; wages structure; Germany;

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    References

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    1. Gibbons, Robert & Katz, Lawrence F, 1991. "Layoffs and Lemons," Journal of Labor Economics, University of Chicago Press, vol. 9(4), pages 351-80, October.
    2. Groot Wim & Mekkelholt Eddie & Oosterbeek, Hessel, 1992. "Further evidence on the wage curve," Economics Letters, Elsevier, vol. 38(3), pages 355-359, March.
    3. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
    4. Carruth, Alan & Schnabel, Claus, 1993. " The Determination of Contract Wages in West Germany," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(3), pages 297-310.
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    7. Hunt, Jennifer, 1995. "The Effect of Unemployment Compensation on Unemployment Duration in Germany," Journal of Labor Economics, University of Chicago Press, vol. 13(1), pages 88-120, January.
    8. Abowd, John M & Corbel, Patrick & Kramarz, Francis, 1997. "The Entry and Exit of Workers and the Growth of Employment: An Analysis of French Establishments," CEPR Discussion Papers 1765, C.E.P.R. Discussion Papers.
    9. Mroz, Thomas A, 1987. "The Sensitivity of an Empirical Model of Married Women's Hours of Work to Economic and Statistical Assumptions," Econometrica, Econometric Society, vol. 55(4), pages 765-99, July.
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    12. Lang, Kevin & Kahn, Shulamit, 1990. "Efficiency Wage Models of Unemployment: A Second View," Economic Inquiry, Western Economic Association International, vol. 28(2), pages 296-306, April.
    13. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
    14. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September.
    15. Manning, Alan, 1987. "An Integration of Trade Union Models in a Sequential Bargaining Framework," Economic Journal, Royal Economic Society, vol. 97(385), pages 121-39, March.
    16. Milton Harris & Bengt Holmstrom, 1981. "A Theory of Wage Dynamics," Discussion Papers 488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    17. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
    18. David Soskice, 1994. "Reconciling Markets and Institutions: The German Apprenticeship System," NBER Chapters, in: Training and the Private Sector, pages 25-60 National Bureau of Economic Research, Inc.
    19. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
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    Cited by:
    1. Ammermüller, Andreas & Kuckulenz, Anja & Zwick, Thomas, 2006. "Aggregate Unemployment Decreases Individual Returns to Education," ZEW Discussion Papers 06-34, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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