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A Competitive Model Of Worker Replacement And Wage Rigidity

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  • Andy Snell
  • Jonathan P. Thomas
  • Zhewei Wang

Abstract

We adapt the models of Menzio and Moen (2010) and Snell and Thomas (2010) to consider a labor market in which firms can commit to wage contracts but cannot commit not to replace incumbent workers. Workers are risk averse, so that there exists an incentive for firms to smooth wages. Real wages respond in a highly nonlinear manner to shocks, exhibiting downward rigidity, and magnifying the response of unemployment to negative shocks. We also consider layoffs and show that for a range of shocks labor hoarding occurs while wages are cut. We argue these features are consistent with recent evidence. (JEL E32, J41)

Suggested Citation

  • Andy Snell & Jonathan P. Thomas & Zhewei Wang, 2015. "A Competitive Model Of Worker Replacement And Wage Rigidity," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 419-430, January.
  • Handle: RePEc:bla:ecinqu:v:53:y:2015:i:1:p:419-430
    DOI: 10.1111/ecin.12110
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    References listed on IDEAS

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    1. Haefke, Christian & Sonntag, Marcus & van Rens, Thijs, 2013. "Wage rigidity and job creation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 887-899.
    2. Johannes F. Schmieder & Till von Wachter, 2010. "Does Wage Persistence Matter for Employment Fluctuations? Evidence from Displaced Workers," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 1-21, July.
    3. Claire Crawford & Wenchao Jin & Helen Simpson, 2013. "Productivity, Investment and Profits during the Great Recession: Evidence from UK Firms and Workers," Fiscal Studies, Institute for Fiscal Studies, vol. 34(2), pages 153-177, June.
    4. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    5. Nils Gottfries & Tomas Sjostrom, 2000. "Insider Bargaining Power, Starting Wages and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 669-688, December.
    6. Marcus Hagedorn & Iourii Manovskii, 2013. "Job Selection and Wages over the Business Cycle," American Economic Review, American Economic Association, vol. 103(2), pages 771-803, April.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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