Dynamics and Asymetric Adjustment in Insider-Outsider Models
This paper analyzes the time consistent and efficient solution for wages and employment in intertemporal insider-outsider models of bargaining with endogenous membership. When the reservation wage is made endogenous in a general equilibrium context, insider-outsider models can generate a fundamental asymmetry in the adjustment of employment to the steady state. While upturns are gradual, severe downturns are characterized by a sharp drop in employment, obtained by laying off workers. Further reductions in employment are achieved solely through quits. Copyright 1992 by Royal Economic Society.
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