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Unemployment Benefits, Contract Length and Nominal Wage Flexibility

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  • Lars Calmfors
  • Åsa Johansson

Abstract

In a bargaining model, we show that a decrease in the unemployment benefit level increases not only equilibrium employment, but also nominal wage flexibility, and thus reduces employment variations in the case of nominal shocks. Long‐term wage contracts lead to higher expected real wages and hence higher expected unemployment than short‐term contracts. Therefore, a decrease in the benefit level reduces the expected utility gross of contract costs of a union member more with long‐term than with short‐term contracts, thereby creating an incentive for shorter contracts. Incentives for employers are shown to change in the same direction.

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  • Lars Calmfors & Åsa Johansson, 2004. "Unemployment Benefits, Contract Length and Nominal Wage Flexibility," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(1), pages 23-44, March.
    • Handle: RePEc:bla:scandj:v:106:y:2004:i:1:p:23-44
    DOI: 10.1111/j.0347-0520.2004.t01-1-00346.x
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    Cited by:

    1. Lars Calmfors & Giancarlo Corsetti & Michael P. Devereux & Seppo Honkapohja & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2007. "Chapter 2: Macroeonomic adjustment in the euro area – the cases of Ireland and Italy," EEAG Report on the European Economy, CESifo, vol. 0, pages 59-72, February.
    2. Knabe, Andreas, 2009. "Implementing endogenous inside options in Nash wage bargaining models," Mathematical Social Sciences, Elsevier, vol. 57(2), pages 161-176, March.

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