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Can insider power affect employment?

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  • Díaz-Vázquez, Pilar
  • Snower, Dennis J.
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    Abstract

    Do firms reduce employment when their insiders (established, incumbent employees) claim higher wages? The conventional answer in the theoretical literature is that insider power has no influence on employment, provided that the newly hired employees (entrants) receive their reservation wages. The reason given is that an increase in insider wages gives rise to a countervailing fall in reservation wages, leaving the present value of wage costs unchanged. Our analysis contradicts this conventional answer. We show that, in the context of a stochastic model of the labor market, an increase in insider wages promotes firing in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment. --

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    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy (IfW) in its series Open Access Publications from Kiel Institute for the World Economy with number 2992.

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    Date of creation: 2003
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    Handle: RePEc:zbw:ifwkie:2992

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    Related research

    Keywords: Employment; Wage determination; market power; insiders; hiring and firing costs;

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    References

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    1. Paola Manzini & Dennis Snower, 1996. "On the Foundations of Wage Bargaining," Archive Discussion Papers 9614, Birkbeck, Department of Economics, Mathematics & Statistics.
    2. Gottfries, Nils & Sjostrom, Tomas, 2000. " Insider Bargaining Power, Starting Wages and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 669-88, December.
    3. Frank, Jeff, 1985. "Trade Union Efficiency and Overemployment with Seniority Wage Scales," Economic Journal, Royal Economic Society, vol. 95(380), pages 1021-34, December.
    4. Vetter, Henrik & Andersen, Torben M, 1994. "Do Turnover Costs Protect Insiders?," Economic Journal, Royal Economic Society, vol. 104(422), pages 124-30, January.
    5. repec:fth:exetec:96/16 is not listed on IDEAS
    6. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
    7. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
    8. Frank, Jeff & Malcomson, James M., 1994. "Trade unions and seniority employment rules," European Economic Review, Elsevier, vol. 38(8), pages 1595-1611, October.
    9. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
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    Citations

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    Cited by:
    1. Chen Yu-Fu & Funke Michael, 2009. "Threshold Effects of Dismissal Protection Regulation and the Emergence of Temporary Work Agencies," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 13(4), pages 1-29, September.
    2. Brown, Alessio J. G. & Merkl, Christian & Snower, Dennis J., 2010. "An Incentive Theory of Matching," Open Access Publications from Kiel Institute for the World Economy 37391, Kiel Institute for the World Economy (IfW).
    3. Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "On-the-Job Training and the Effects of Insider Power," IZA Discussion Papers 586, Institute for the Study of Labor (IZA).
    4. Chen, Yu-Fu & Funke, Michael, 2009. "China's new Labour Contract Law: No harm to employment?," China Economic Review, Elsevier, vol. 20(3), pages 558-572, September.
    5. Chen, Yu-Fu & Funke, Michael, 2008. "Product market competition, investment and employment-abundant versus job-poor growth: A real options perspective," European Journal of Political Economy, Elsevier, vol. 24(1), pages 218-238, March.
    6. Diaz-Vazquez, Pilar & Snower, Dennis J., 2003. "On-the-Job Training, Firing Costs and Employment," IZA Discussion Papers 910, Institute for the Study of Labor (IZA).
    7. Diaz-Vazquez, Pilar & Snower, Dennis, 2006. "On-the-Job Learning and the Effects of Insider Power," Labour Economics, Elsevier, vol. 13(3), pages 317-341, June.
    8. Yu-Fu Chen & Michael Funke, 2006. "Threshold Effects of Dismissal Protection Regulations and Employment Dynamics," Dundee Discussion Papers in Economics 195, Economic Studies, University of Dundee.

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