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Labor Contracts, Equal Treatment and Wage-Unemployment Dynamics

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  • Andy Snell
  • Jonathan Thomas

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 actual unemployment and wage series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0603.pdf
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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0603.

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Date of creation: Sep 2006
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Handle: RePEc:san:cdmacp:0603

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  1. Truman F. Bewley, 1999. "Work Motivation," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1209, Cowles Foundation for Research in Economics, Yale University.
  2. 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.
  3. Gottfries, Nils & Sjöström, Tomas, 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Working Paper Series, Uppsala University, Department of Economics 1998:10, Uppsala University, Department of Economics.
  4. Donggyun Shin & Kwanho Shin, 2003. "Why Are The Wages of Job Stayers Procyclical?," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0573, Institute of Social and Economic Research, Osaka University.
  5. Holmstrom, Bengt, 1983. "Equilibrium Long-Term Labor Contracts," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(3), pages 23-54, Supplemen.
  6. Michael W. L. Elsby, 2005. "Evaluating the Economic Significance of Downward Nominal Wage Rigidity," CEP Discussion Papers dp0704, Centre for Economic Performance, LSE.
  7. Carruth, Alan A & Oswald, Andrew J, 1987. "On Union Preferences and Labour Market Models: Insiders and Outsi ders," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(386), pages 431-45, June.
  8. Agell, Jonas & Lundborg, Per, 1999. "Survey evidence on wage rigidity and unemployment: Sweden in the 1990s," Working Paper Series, IFAU - Institute for Evaluation of Labour Market and Education Policy 1999:2, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  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, The University of Melbourne 588, The University of Melbourne.
  10. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 447-80, March.
  11. Louis N. Christofides & Thanasis Stengos, 2003. "Wage rigidity in Canadian collective bargaining agreements," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(3), pages 429-448, April.
  12. 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.
  13. Lorne Carmichael, 1981. "Firm-Specific Human Capital and Promotion Ladders," Working Papers, Queen's University, Department of Economics 452, Queen's University, Department of Economics.
  14. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 921-55, November.
  15. 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, Royal Economic Society, vol. 115(506), pages 833-859, October.
  16. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(2), pages 252-70, April.
  17. 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, University of Chicago Press, vol. 99(4), pages 665-88, August.
  18. John Moore, 2007. "Stable Sets And Steady Wages," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 721-730, November.
  19. Truman Bewley, 1999. "Work motivation," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-49.
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Cited by:
  1. Jonathan P Thomas & Tim Worrall, 2007. "Limited Commitment Models of the Labour Market," Keele Economics Research Papers, Centre for Economic Research, Keele University KERP 2007/11, Centre for Economic Research, Keele University.
  2. 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.
  3. Jonathan Thomas & Andy Snell, 2007. " Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting," CDMA Conference Paper Series, Centre for Dynamic Macroeconomic Analysis 0708, Centre for Dynamic Macroeconomic Analysis.
  4. Menzio, Guido & Moen, Espen R, 2008. "Worker Replacement," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7075, C.E.P.R. Discussion Papers.
  5. 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).

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