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Employment Fluctuations with Downward Wage Rigidity

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  • James Costain

    (Bank of Spain)

  • Marcel Jansen

    ()
    (Economics Universidad Carlos III de Madrid)

Abstract

This paper considers a dynamic matching model with imperfectly observable worker effort as in Shapiro and Stiglitz (1994). In our economy the no-shirking condition endogenously imposes real wage rigidity on the matching market. This generates "contractual fragility" and inefficient separations as in Ramey and Watson (1997). Nonetheless, our main finding is that imperfectly observable effort smoothes job destruction over the cycle. The reason is that firms are forced, in good states, to terminate some marginal jobs that they cannot commit to maintain in bad states. This time-inconsistency problem casts doubts on the importance of inefficient churning as an explanation of observed employment fluctuations. On the other hand, the no-shirking condition implies that the surplus share of firms is pro-cyclical, which can amplify fluctuations in job creation. Thus, our model is consistent with recent evidence that job creation is more important than job destruction in driving labor market fluctuations, and it therefore also tends to generate a robust Beveridge curve.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 204.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:204

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Keywords: Job matching; wage rigidity; efficiency wages; contractual fragility;

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References

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Citations

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Cited by:
  1. Norikazu Tawara, 2008. "No-shirking Conditions in Frictional Labor Markets," Economics Bulletin, AccessEcon, vol. 10(1), pages 1-10.
  2. Eliaz, Kfir & Spiegler, Rani, 2012. "Reference Dependence and Labor-Market Fluctuations," CEPR Discussion Papers 8997, C.E.P.R. Discussion Papers.
  3. Kangwoo Park, 2007. "Labor-Market Implications of Contracts under Moral Hazard," 2007 Meeting Papers 277, Society for Economic Dynamics.
  4. Katarzyna Budnik, 2012. "Do those who stay work less? On the impact of emigration on the measured TFP in Poland," National Bank of Poland Working Papers 113, National Bank of Poland, Economic Institute.
  5. Fahr Staphen & Abbritti Mirko, 2011. "Macroeconomic implications of downward wage rigidities," wp.comunite 0088, Department of Communication, University of Teramo.
  6. Richard Rogerson & Robert Shimer, 2010. "Search in Macroeconomic Models of the Labor Market," NBER Working Papers 15901, National Bureau of Economic Research, Inc.
  7. repec:ebl:ecbull:v:10:y:2008:i:1:p:1-10 is not listed on IDEAS

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