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Labor Contracts, Equal Treatment and Wage-Unemployment Dynamics

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  • Jonathan P. Thomas

    (University of Edinburgh)

  • Andy Snell

    (University of Edinburgh)

Abstract

This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics and unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match unemployment series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 179.

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Date of creation: 2009
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Handle: RePEc:red:sed009:179

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References

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  1. Holmstrom, Bengt, 1983. "Equilibrium Long-Term Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 23-54, Supplemen.
  2. 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.
  3. Paul J. Devereux & Robert A. Hart, 2007. "The Spot Market Matters: Evidence On Implicit Contracts From Britain," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 661-683, November.
  4. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
  5. Jonas Agell & Per Lundborg, 2003. "Survey Evidence on Wage Rigidity and Unemployment: Sweden in the 1990s," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(1), pages 15-30, 03.
  6. John Moore, 2007. "Stable Sets And Steady Wages," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 721-730, November.
  7. Jonathan P. Thomas, 2005. "Fair pay and a Wage-Bill Argument for low Real Wage Cyclicality and Excessive Employment Variability," Economic Journal, Royal Economic Society, vol. 115(506), pages 833-859, October.
  8. Gottfries, N. & Sjostrom, Y., 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Papers 1998-10, Uppsala - Working Paper Series.
  9. McDonald, J.T. & Worswick, C., 1997. "Wages, Implicit Contracts and the Business Cycle: Evidence from Canadian Micro Data," Department of Economics - Working Papers Series 588, The University of Melbourne.
  10. Louis N. Christofides & Thanasis Stengos, 2003. "Wage Rigidity in Canadian Collective Bargaining Agreements ," University of Cyprus Working Papers in Economics 1-2003, University of Cyprus Department of Economics.
  11. Donggyun Shin & Kwanho Shin, 2003. "Why Are The Wages of Job Stayers Procyclical?," ISER Discussion Paper 0573, Institute of Social and Economic Research, Osaka University.
  12. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
  13. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc.
  14. Truman Bewley, 1999. "Work motivation," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-49.
  15. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
  16. Truman F. Bewley, 1999. "Work Motivation," Cowles Foundation Discussion Papers 1209, Cowles Foundation for Research in Economics, Yale University.
  17. Carruth, Alan A & Oswald, Andrew J, 1987. "On Union Preferences and Labour Market Models: Insiders and Outsi ders," Economic Journal, Royal Economic Society, vol. 97(386), pages 431-45, June.
  18. Lorne Carmichael, 1981. "Firm-Specific Human Capital and Promotion Ladders," Working Papers 452, Queen's University, Department of Economics.
  19. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 252-70, April.
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Cited by:
  1. Guido Menzio & Espen R. Moen, 2010. "Worker replacement," NBER Working Papers 15983, National Bureau of Economic Research, Inc.
  2. Martins, Pedro S. & Snell, Andy & Thomas, Jonathan P., 2009. "Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting," IZA Discussion Papers 4346, Institute for the Study of Labor (IZA).
  3. Jonathan P Thomas & Tim Worrall, 2007. "Limited Commitment Models of the Labour Market," Keele Economics Research Papers KERP 2007/11, Centre for Economic Research, Keele University.
  4. Jonathan Thomas & Andy Snell, . " Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting," CDMA Conference Paper Series 0708, Centre for Dynamic Macroeconomic Analysis.
  5. Pedro S. Martins & Gary Solon & Jonathan Thomas, 2010. "Measuring What Employers Really Do about Entry Wages over the Business Cycle," NBER Working Papers 15767, National Bureau of Economic Research, Inc.

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