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Unemployment Benefits, Contract Length And Nominal Wage Flexibility

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  • Calmfors, Lars

    (Institute for International Economic Studies, Stockholm University)

  • Johansson, Åsa

    (OECD)

Abstract

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.

Suggested Citation

  • Calmfors, Lars & Johansson, Åsa, 2001. "Unemployment Benefits, Contract Length And Nominal Wage Flexibility," Seminar Papers 692, Stockholm University, Institute for International Economic Studies.
    • Handle: RePEc:hhs:iiessp:0692
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    References listed on IDEAS

    as
    1. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084, Elsevier.
    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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    Cited by:

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    2. Pasquale Commendatore & Ingrid Kubin, 2009. "Dynamic effects of regulation and deregulation in goods and labour markets," Oxford Economic Papers, Oxford University Press, vol. 61(3), pages 517-537, July.

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    More about this item

    Keywords

    nominal wage flexibility; contract length; macroeconomic fluctuations; unemployment benefits.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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