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Self-enforcing Employment Contracts and Business Cycle Fluctuations

It is often argued that risk-sharing employment relationships provide a better description of labour relations than the standard Walrasian framework. Such relationships have been introduced in macroeconomic models under an assumption of full commitment. In the absence of commitment, however, these relationships must be self-enforcing. This paper examines the impact of limited commitment on labour market fluctuations. It is shown that self-enforcing employment contracts can explain several stylized facts related to the comovements of real wages and hours worked. Moreover, implications for the estimation of intertemporal labour supply elasticities are highlighted. In particular, it is shown that empirical studies of labour supply that neglect the existence of self-enforcing contracts may severely underestimate workers' willingness to substitute leisure intertemporally. On dit souvent que des relations d'emploi impliquant un partage de risque donnent une meilleure description des relations de travail que le cadre Walrasien traditionnel. De telles relations ont été introduites dans des modèles macroéconomiques sous l'hypothèse de plein engagement. Toutefois, en l'absense d'engagement, ces relations doivent être auto-exécutoires. Ce papier étudie l'impact de l'engagement limité sur les fluctuations du marché de l'emploi. Il est montré que les contrats de travail auto-exécutoires peuvent expliquer plusieurs faits caractéristiques reliés aux comouvements du salaire réel et des heures travaillées. De plus, des implications pour l'estimation de l'élasticité intertemporelle de l'offre de travail sont mises en évidence. En particulier, il est montré que les études empiriques qui négligent l'existence de contrats auto-exécutoires peuvent sous-estimer sévèrement la volonté des travailleurs de substituter les loisirs entre les périodes.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 127.

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Length: 29 pages
Date of creation: Aug 2000
Date of revision:
Handle: RePEc:cre:crefwp:127
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  1. Rogerson, Richard & Rupert, Peter, 1993. "On testing the intertemporal substitution theory of labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 37-50.
  2. 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.
  3. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  4. Gomme, P. & Greenwood, J., 1992. "On the Cyclical Allocation of Risk," UWO Department of Economics Working Papers 9205, University of Western Ontario, Department of Economics.
  5. Thomas, Jonathan & Worrall, Tim, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 81-108, January.
  6. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  7. Boldrin, Michael & Horvath, Michael, 1995. "Labor Contracts and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 972-1004, October.
  8. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  9. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  10. Jean-Pierre DANTHINE & John B. DONALDSON, 1991. "Risk Sharing in the Business Cycle," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9109, Université de Lausanne, Faculté des HEC, DEEP.
  11. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
  12. Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-59, November.
  13. Beaudry, Paul & DiNardo, John, 1995. "Is the Behavior of Hours Worked Consistent with Implicit Contract Theory?," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 743-68, August.
  14. W. Bentley MacLeod & James Malcomson, 1997. "Motivation and Markets," Boston College Working Papers in Economics 339., Boston College Department of Economics.
  15. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-75, September.
  16. Joseph Altonji, 1984. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Working Papers 562, Princeton University, Department of Economics, Industrial Relations Section..
  17. John M. Abowd & David Card, 1986. "Intertemporal Labor Supply and Long Term Employment Contracts," NBER Working Papers 1831, National Bureau of Economic Research, Inc.
  18. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  19. Beaudry, Paul & van Wincoop, Eric, 1996. "The Intertemporal Elasticity of Substitution: An Exploration Using a US Panel of State Data," Economica, London School of Economics and Political Science, vol. 63(251), pages 495-512, August.
  20. Beaudry, Paul & Pages, Carmen, 2001. "The cost of business cycles and the stabilization value of unemployment insurance," European Economic Review, Elsevier, vol. 45(8), pages 1545-1572, August.
  21. Kimmel, Jean & Kniesner, Thomas J., 1998. "New evidence on labor supply:: Employment versus hours elasticities by sex and marital status," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 289-301, July.
  22. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  23. Bansak, Cynthia A & Raphael, Steven, 1998. "Have Employment Relationships in the United States Become Less Stable?," University of California at San Diego, Economics Working Paper Series qt7d04m8jx, Department of Economics, UC San Diego.
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