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Nominal Wage Contracts, Aggregate and Firm-Specific Uncertainty – How High is the Private Gain from Indexation?

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  • Laséen, Stefan

    () (Department of Economics)

Abstract

In this paper I investigate to what extent firm-specific uncertainty affects the gain from indexation. Earlier studies have tried to explain wage rigidity by arguing that insiders face little layoff risk due to employment fluctuations caused by aggregate shocks. However, this analysis abstracts from idiosyncratic risk and this seems hard to reconcile with recent microeconomic evidence which shows that firm-specific uncertainty explains a large part of establishments' employment changes. By numerically solving an insider-outsider model I show that the introduction of firm-specific uncertainty increases the gain from indexation considerably (from 0 to 1.5 percent of the wage). It is not evident that the gain from indexation is small enough to support an equilibrium with a constant nominal wage. According to the model, nominal wage contracts should be more prevalent, when layoff is not so costly for the worker, due to high unemployment benefits or short duration of unemployment spells.

Suggested Citation

  • Laséen, Stefan, 2000. "Nominal Wage Contracts, Aggregate and Firm-Specific Uncertainty – How High is the Private Gain from Indexation?," Working Paper Series 2000:11, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uunewp:2000_011
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    References listed on IDEAS

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    1. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
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    3. Andersen, Torben M., 1994. "Price Rigidity: Causes and Macroeconomic Implications," OUP Catalogue, Oxford University Press, number 9780198287605.
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    6. George A. Akerlof & Andrew K. Rose & Janet L. Yellen, 1988. "Job Switching and Job Satisfaction in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 495-594.
    7. 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 665-688, August.
    8. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
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    More about this item

    Keywords

    Indexation; Wage contracts; Insider-outsider models;

    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
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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