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The Advantage of Employing Workers With Short Time Perspectives

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  • Burkle, Thomas

Abstract

This paper examines labor contracts as a form of insurance contracts. It assumes that workers are risk averse with the time perspective (or planning period) of a worker combining a period of T distinct spells t, with length of a spell being the same for all workers (a spell might be a year for example). Workers are assumed to differ only according to their time perspective: For example some workers planning period may consist of only one spell (T=1), while for others it may be three spells (T=3). The analysis starts with the assumption that workers are hired on a neoclassical spot contract at the beginning of each spell . Then it shows that, if workers objective is to maximize the sum of their incomes over all spells in their planing period, income risk that derives from the uncertainty of employment caused by stochastical business cycles in each spell will be more threatening to workers with a shorter time perspective T than to those with a longer time perspective. Therefore, if a firm offers an institutionalized contract that bears no employment risk and covers the worker´s individual planning period T, the worker´s willingness to pay risk premiums by wage concessions decreases, the longer is his planning period. On this pure risk theoretical point of view, the firm will prefer workers with short individual planning periods in order to maximize their insurance premiums. Thus this paper contradicts the common argument that long term contracts are advantageous to firms.

Suggested Citation

  • Burkle, Thomas, 2003. "The Advantage of Employing Workers With Short Time Perspectives," Institute for Research on Labor and Employment, Working Paper Series qt6pg5q88n, Institute of Industrial Relations, UC Berkeley.
  • Handle: RePEc:cdl:indrel:qt6pg5q88n
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    References listed on IDEAS

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    1. Fudenberg, Drew & Holmstrom, Bengt & Milgrom, Paul, 1990. "Short-term contracts and long-term agency relationships," Journal of Economic Theory, Elsevier, vol. 51(1), pages 1-31, June.
    2. Rey, Patrick & Salanie, Bernard, 1990. "Long-term, Short-term and Renegotiation: On the Value of Commitment in Contracting," Econometrica, Econometric Society, vol. 58(3), pages 597-619, May.
    3. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
    4. Kihlstrom, Richard E. & Mirman, Leonard J., 1974. "Risk aversion with many commodities," Journal of Economic Theory, Elsevier, vol. 8(3), pages 361-388, July.
    5. Taylor, Mark P, 1987. "The Simple Analytics of Implicit Labour Contracts," Bulletin of Economic Research, Wiley Blackwell, vol. 39(1), pages 1-27, January.
    6. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-1175, September.
    7. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    8. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
    9. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 37-50.
    10. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
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