Can Insider Power Affect Employment?
Do firms reduce employment when their insiders (established, incumbent employees) claim higher wages? The conventional answer in the theoretical literature is that insider power has no influence on employment, provided that the newly hired employees (entrants) receive their reservation wages. The reason given is that an increase in insider wages gives rise to a counterveiling fall in reservation wages, leaving the present value of wage costs unchanged. Our analysis contradicts this conventional answer. We show that, in the context of a stochastic model of the labor market, an increase in insider wages promotes firing in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment.
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- Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
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- Manzini, P. & Snower, D.J., 1996. "On the Foundations of Wage Bargaining," Discussion Papers 9616, Exeter University, Department of Economics.
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- Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "On-the-Job Training and the Effects of Insider Power," IZA Discussion Papers 586, Institute for the Study of Labor (IZA).
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