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Unemployment Benefits, Contract Length And Nominal Wage Flexibility

  • Calmfors, Lars

    ()

    (Institute for International Economic Studies, Stockholm University)

  • Johansson, Åsa

    ()

    (OECD)

Registered author(s):

    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.

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    File URL: http://su.diva-portal.org/smash/get/diva2:328757/FULLTEXT01
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    Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 692.

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    Length: 43 pages
    Date of creation: 15 May 2001
    Date of revision:
    Handle: RePEc:hhs:iiessp:0692
    Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
    Phone: +46-8-162000
    Fax: +46-8-161443
    Web page: http://www.iies.su.se/
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    1. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
    2. Andersen, Torben M. & Sorensen, Jan Rose, 1988. "Exchange rate variability and wage formation in open economies," Economics Letters, Elsevier, vol. 28(3), pages 263-268.
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