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Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard

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  • James Costain
  • Marcel Jansen

Abstract

We study the cyclical dynamics of job creation and destruction when workers' effort is not perfectly observable. The no‐shirking constraint may amplify fluctuations in hiring by making firms' surplus share procyclical, and may cause a burst of inefficient firing when a downturn begins. But quantitatively, it mainly raises the cost of motivating marginal workers in booms, since firms cannot commit to keep them in recessions, and thereby strongly damps the countercyclical fluctuations in the separation rate. This implies a robust Beveridge curve, but casts doubt on Ramey and Watson's (1997)“contractual fragility” mechanism and worsens Shimer's (2005a)“volatility puzzle”.

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  • James Costain & Marcel Jansen, 2010. "Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 782-811, December.
  • Handle: RePEc:bla:scandj:v:112:y:2010:i:4:p:782-811
    DOI: 10.1111/j.1467-9442.2010.01625.x
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    2. Martin, Christopher & Wang, Bingsong, 2020. "Search, shirking and labor market volatility," Journal of Macroeconomics, Elsevier, vol. 66(C).
    3. Katarzyna Budnik, 2012. "Do those who stay work less? On the impact of emigration on the measured TFP in Poland," NBP Working Papers 113, Narodowy Bank Polski, Economic Research Department.
    4. Julien Champagne, 2015. "The Carrot and the Stick: The Business Cycle Implications of Incentive Pay in the Labor Search Model," Staff Working Papers 15-35, Bank of Canada.
    5. Fahr, Stephan & Abbritti, Mirko, 2011. "Macroeconomic implications of downward wage rigidities," Working Paper Series 1321, European Central Bank.
    6. Norikazu Tawara, 2008. "No-shirking Conditions in Frictional Labor Markets," Economics Bulletin, AccessEcon, vol. 10(1), pages 1-10.
    7. Kfir Eliaz & Ran Spiegler, 2014. "Reference Dependence and Labor Market Fluctuations," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 159-200.
    8. Kangwoo Park, 2007. "Labor-Market Implications of Contracts under Moral Hazard," 2007 Meeting Papers 277, Society for Economic Dynamics.
    9. Lunardelli, Andre, 2014. "Fairness and the disinflation puzzle," Economics Discussion Papers 2014-32, Kiel Institute for the World Economy (IfW).
    10. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 7, pages Pages: 61, Elsevier.
    11. Pei Kuang & Tong Wang, 2017. "Labor Market Dynamics With Search Frictions And Fair Wage Considerations," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1336-1349, July.

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    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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