Unemployment Benefits, Contract Length And Nominal Wage Flexibility
We show in a union-bargaining model that a decrease in the unemployment benefit level increases not only equilibrium employment, but also nominal wage flexibility, and thus reduces employment variations in the case of nominal shocks. Long-term wage contracts lead to higher expected real wages and hence higher expected unemployment than short-term contracts. Therefore lower benefits reduce the expected utility gross of contract costs of a union member more with long-term than with short-term contracts and thus create an incentive for shorter contracts. Incentives for employers work in the same direction. Lower taxes associated with lower benefits also tend to make short-term contracts more attractive.
|Date of creation:||15 May 2001|
|Date of revision:|
|Contact details of provider:|| Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden|
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- Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
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