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Employment fluctuations with downward wage rigidity: the role of moral hazard

Author

Listed:
  • James Costain

    () (Banco de España)

  • Marcel Jansen

    () (Universidad Carlos III de Madrid)

Abstract

This paper considers a dynamic matching model with imperfectly observable worker effort. In equilibrium, the wage distribution is truncated from below by a no-shirking condition. This downward wage rigidity induces the same type of inefficient churning and "contractual fragility" as in Ramey and Watson (1997). Nonetheless, the surprising lesson of our analysis is that workers' shirking motive reduces the cyclical fluctuations in job destruction, because firms are forced to terminate some marginal jobs in booms which they cannot commit to maintain in recessions. This time-inconsistency problem casts doubt upon the importance of inefficient churning as an explanation of observed employment fluctuations. On the other hand, the no-shirking condition implies that firms' share of surplus is procyclical, which can amplify fluctuations in job creation. Thus, our model is consistent with recent evidence that job creation is more important than job destruction in driving labor market fluctuations. Furthermore, unlike most models with endogenous job destruction, we obtain a robust Beveridge curve.

Suggested Citation

  • James Costain & Marcel Jansen, 2006. "Employment fluctuations with downward wage rigidity: the role of moral hazard," Working Papers 0632, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0632
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    Citations

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    Cited by:

    1. Kfir Eliaz & Ran Spiegler, 2014. "Reference Dependence and Labor Market Fluctuations," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 159-200.
    2. repec:ebl:ecbull:v:10:y:2008:i:1:p:1-10 is not listed on IDEAS
    3. Fahr, Stephan & Abbritti, Mirko, 2011. "Macroeconomic implications of downward wage rigidities," Working Paper Series 1321, European Central Bank.
    4. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, Elsevier.
    5. 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.
    6. 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.
    7. repec:bla:ecinqu:v:55:y:2017:i:3:p:1336-1349 is not listed on IDEAS
    8. Lunardelli, Andre, 2014. "Fairness and the disinflation puzzle," Economics Discussion Papers 2014-32, Kiel Institute for the World Economy (IfW).
    9. Norikazu Tawara, 2008. "No-shirking Conditions in Frictional Labor Markets," Economics Bulletin, AccessEcon, vol. 10(1), pages 1-10.

    More about this item

    Keywords

    job matching; wage rigidity; efficiency wages; contractual fragility;

    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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