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Can Insider Power Affect Employment?

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  • Diaz-Vazquez, Pilar
  • Snower, Dennis J.

Abstract

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.

Suggested Citation

  • Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "Can Insider Power Affect Employment?," CEPR Discussion Papers 3472, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3472
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    References listed on IDEAS

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    1. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
    2. Manzini, Paola & Snower, Dennis J., 1996. "On the Foundations of Wage Bargaining," CEPR Discussion Papers 1514, C.E.P.R. Discussion Papers.
    3. 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).
    4. Burda, Michael C, 1992. " A Note on Firing Costs and Severance Benefits in Equilibrium Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(3), pages 479-489.
    5. Frank, Jeff, 1985. "Trade Union Efficiency and Overemployment with Seniority Wage Scales," Economic Journal, Royal Economic Society, vol. 95(380), pages 1021-1034, December.
    6. Frank, Jeff & Malcomson, James M., 1994. "Trade unions and seniority employment rules," European Economic Review, Elsevier, vol. 38(8), pages 1595-1611, October.
    7. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
    8. repec:exe:wpaper:96/16 is not listed on IDEAS
    9. Vetter, Henrik & Andersen, Torben M, 1994. "Do Turnover Costs Protect Insiders?," Economic Journal, Royal Economic Society, vol. 104(422), pages 124-130, January.
    10. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
    11. Fehr, Ernst & Kirchsteiger, Georg, 1994. "Insider Power, Wage Discrimination and Fairness," Economic Journal, Royal Economic Society, vol. 104(424), pages 571-583, May.
    12. Gottfries, Nils & Sjostrom, Tomas, 2000. " Insider Bargaining Power, Starting Wages and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 669-688, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Brown, Alessio & Merkl, Christian & Snower, Dennis, 2015. "An Incentive Theory Of Matching," Macroeconomic Dynamics, Cambridge University Press, vol. 19(03), pages 643-668, April.
    2. Diaz-Vazquez, Pilar & Snower, Dennis, 2006. "On-the-Job Learning and the Effects of Insider Power," Labour Economics, Elsevier, vol. 13(3), pages 317-341, June.
    3. Chen, Yu-Fu & Funke, Michael, 2008. "Product market competition, investment and employment-abundant versus job-poor growth: A real options perspective," European Journal of Political Economy, Elsevier, vol. 24(1), pages 218-238, March.
    4. Diaz-Vazquez, Pilar & Snower, Dennis J., 2003. "On-the-Job Training, Firing Costs and Employment," IZA Discussion Papers 910, Institute for the Study of Labor (IZA).
    5. Jo Seldeslachts, 2002. "Interactions Between Product and Labour Market Reforms," UFAE and IAE Working Papers 519.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    6. Chen, Yu-Fu & Funke, Michael, 2009. "China's new Labour Contract Law: No harm to employment?," China Economic Review, Elsevier, vol. 20(3), pages 558-572, September.
    7. 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).

    More about this item

    Keywords

    business cycles; employment; hiring and firing costs; insiders; wages;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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