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How Close to an Auction Is the Labor Market? Employee Risk Aversion, Income Uncertainty, and Optimal Labor Contracts

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  • James N. Brown
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    Abstract

    Section I of this paper develops a model of income insurance in the labor market. The model differs from those of previous analyses in its focus on quantitative implications regarding the degree to which wages diverge from marginal value products, both in time-series and in cross-section data. Sections II and III present empirical evidence consistent with these implications. The main empirical finding is that of short-term divergence, but long-term equality between wages and marginal value products. The labor market appears to differ from an auction market only in the short run, but this short-run divergence considerably reduces the potential variability of employees' realized wealth.

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    File URL: http://www.nber.org/papers/w0603.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0603.

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    Date of creation: Dec 1980
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    Handle: RePEc:nbr:nberwo:0603

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    1. Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Wiley Blackwell, vol. 47(2), pages 321-38, January.
    2. Azariadis, Costas, 1978. "Escalator clauses and the allocation of cyclical risks," Journal of Economic Theory, Elsevier, vol. 18(1), pages 119-155, June.
    3. Polemarchakis, H M, 1979. "Implicit Contracts and Employment Theory," Review of Economic Studies, Wiley Blackwell, vol. 46(1), pages 97-108, January.
    4. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
    5. Mayers, David & Thaler, Richard, 1979. "Sticky Wages and Implicit Contracts: A Transactional Approach," Economic Inquiry, Western Economic Association International, vol. 17(4), pages 559-74, October.
    6. Parsons, Donald O, 1972. "Specific Human Capital: An Application to Quit Rates and Layoff Rates," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1120-43, Nov.-Dec..
    7. Marc Nerlove, 1967. "Recent Empirical Studies of the CES and Related Production Functions," NBER Chapters, in: The Theory and Empirical Analysis of Production, pages 55-136 National Bureau of Economic Research, Inc.
    8. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 937-57, October.
    9. Grossman, Herschel I., 1978. "Risk shifting, layoffs, and seniority," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 661-686, November.
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