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Wage Adjustment in Efficient Long-Term Employment Relationships

Author

Listed:
  • Michael W. L. Elsby
  • Axel Gottfries
  • Pawel Krolikowski
  • Gary Solon

Abstract

We present a model in which efficient long-term employment relationships are sustained by wage adjustments prompted by productivity shocks and outside job offers. These wage adjustments occur only sporadically, due to the presence of renegotiation costs. The model is amenable to analytical solution, yielding new insights for several labor market phenomena, including (i) key features of empirical distributions of changes in pay among job stayers, (ii) a near-"memorylessness" property in wage dynamics whereby hiring wages have only limited influence on later wages and allocation decisions, and (iii) a crucial role for recruitment and retention bonuses in sustaining efficient employment relationships.

Suggested Citation

  • Michael W. L. Elsby & Axel Gottfries & Pawel Krolikowski & Gary Solon, 2026. "Wage Adjustment in Efficient Long-Term Employment Relationships," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(4), pages 271-317, October.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:4:p:271-317
    DOI: 10.1257/mac.20230278
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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