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Does Wage Persistence Matter for Employment Fluctuations? Evidence from Displaced Workers

  • Johannes F. Schmieder
  • Till von Wachter

Previous literature has found that tight labor market conditions during a job raise wages. Using the Displaced Worker Survey from 1984 to 2006, we show that wage gains associated with good labor market conditions disappear at job loss. We also find that workers with higher wages due to tight past labor market conditions face higher risk of layoff. These findings suggest an important role of persistent rigidities in the wage setting process that are related to layoff decisions. This supports the notion that downward rigid employment contracts help explain the Shimer (2005) "puzzle" of low wage relative to employment fluctuations. (JEL J31, J41, J63)

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Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

Volume (Year): 2 (2010)
Issue (Month): 3 (July)
Pages: 1-21

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Handle: RePEc:aea:aejapp:v:2:y:2010:i:3:p:1-21
Note: DOI: 10.1257/app.2.3.1
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  1. Maxim Poletaev & Chris Robinson, 2008. "Human Capital Specificity: Evidence from the Dictionary of Occupational Titles and Displaced Worker Surveys 1984-2000," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20083, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  2. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February.
  3. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2003. "Wage bargaining with on-the-job search : theory and evidence," Research Unit Working Papers 0212, Laboratoire d'Economie Appliquee, INRA.
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  7. 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.
  8. 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.
  9. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-76, February.
  10. Illoong Kwon & Eva Meyersson Milgrom, 2007. "Cohort Effects in Wages and Promotions," Discussion Papers 07-025, Stanford Institute for Economic Policy Research.
  11. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  12. Lawrence F. Katz & Olivier Blanchard, 1999. "Wage Dynamics: Reconciling Theory and Evidence," American Economic Review, American Economic Association, vol. 89(2), pages 69-74, May.
  13. Darren Grant, 2003. "The effect of implicit contracts on the movement of wages over the business cycle: Evidence from the national longitudinal surveys," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(3), pages 393-408, April.
  14. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
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  16. 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.
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  19. repec:hal:cesptp:hal-00176090 is not listed on IDEAS
  20. Solon, Gary & Barsky, Robert & Parker, Jonathan A, 1994. "Measuring the Cyclicality of Real Wages: How Important Is Composition Bias?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 1-25, February.
  21. Till von Wachter & Jae Song & Joyce Manchester, 2008. "Long-Term Earnings Losses due to Job Separation During the 1982 Recession: An Analysis Using Longitudinal Administrative Data from 1974 to 2004," Discussion Papers 0708-16, Columbia University, Department of Economics.
  22. Arthur M. Okun, 1973. "Upward Mobility in a High-Pressure Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 207-262.
  23. Beaudry, Paul & DiNardo, John, 1995. "Is the Behavior of Hours Worked Consistent with Implicit Contract Theory?," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 743-68, August.
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