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Worker Replacement

  • Menzio, Guido
  • Moen, Espen R

We consider a frictional labor market in which firms want to insure their senior employees against income fluctuations and, at the same time, want to recruit new employees to fill their vacant positions. Firms can commit to a wage schedule, i.e. a schedule that specifies the wage paid by the firm to its employees as function of their tenure and other observables. However, firms cannot commit to the employment relationship with any of their workers, i.e. firms can dismiss workers at will. We find that, because of the firm's limited commitment, the optimal schedule prescribes not only a rigid wage for senior employees, but also a downward rigid wage for new hires. Moreover, we find that, while the rigidity of the wage of senior workers does not affect the allocation of labor, the rigidity of the wage of new hires magnifies the response of unemployment and vacancies to negative shocks to the aggregate productivity of labor.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7075.

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Date of creation: Dec 2008
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Handle: RePEc:cpr:ceprdp:7075
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  1. Guido Menzio & Shouyong Shi, 2009. "Block Recursive Equilibria for Stochastic Models of Search on the Job," PIER Working Paper Archive 09-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle," Working Papers tecipa-327, University of Toronto, Department of Economics.
  3. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  4. Leena Rudanko, 2008. "Labor Market Dynamics under Long Term Wage Contracting," Boston University - Department of Economics - Working Papers Series wp2008-003, Boston University - Department of Economics.
  5. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  6. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  7. Jonathan P. Thomas & Andy Snell, 2009. "Labor Contracts, Equal Treatment and Wage-Unemployment Dynamics," 2009 Meeting Papers 179, Society for Economic Dynamics.
  8. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
  9. Alan S. Blinder & Don H. Choi, 1989. "A Shred of Evidence on Theories of Wage Stickiness," NBER Working Papers 3105, National Bureau of Economic Research, Inc.
  10. Ramey, Garey, 2008. "Exogenous vs. Endogenous Separation," University of California at San Diego, Economics Working Paper Series qt0qb196qd, Department of Economics, UC San Diego.
  11. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  12. John Kennan, 2010. "Private Information, Wage Bargaining and Employment Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 633-664.
  13. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
  14. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
  15. Mark Gertler & Antonella Trigari, 2006. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Computing in Economics and Finance 2006 525, Society for Computational Economics.
  16. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Agell, Jonas & Bennmarker, Helge, 2007. "Wage incentives and wage rigidity: A representative view from within," Labour Economics, Elsevier, vol. 14(3), pages 347-369, June.
  18. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
  19. Espen R. Moen & Asa Rosen, 2007. "Incentives in competitive search equilibrium," LSE Research Online Documents on Economics 19663, London School of Economics and Political Science, LSE Library.
  20. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-90, September.
  21. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  22. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
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