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Can Insider Power Affect Employment?

  • Diaz-Vazquez, Pilar

    ()

    (University of Santiago de Compostela, Spain)

  • Snower, Dennis J.

    ()

    (Kiel Institute for the World Economy)

Do firms reduce employment when their insiders (established, incumbent employees) claim higher wages? The conventional answer in the theoretical literature is that insider power has no influence on employment, provided that the newly hired employees (entrants) receive their reservation wages. The reason given is that an increase in insider wages gives rise to a counterveiling fall in reservation wages, leaving the present value of wage costs unchanged. Our analysis contradicts this conventional answer. We show that, in the context of a stochastic model of the labor market, an increase in insider wages promotes firming in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 506.

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Length: 16 pages
Date of creation: May 2002
Date of revision:
Publication status: published in: German Economic Review, 2003, 4 (2), 139-150
Handle: RePEc:iza:izadps:dp506
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  1. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
  2. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
  3. Vetter, Henrik & Andersen, Torben M, 1994. "Do Turnover Costs Protect Insiders?," Economic Journal, Royal Economic Society, vol. 104(422), pages 124-30, January.
  4. Manzini, P. & Snower, D.J., 1996. "On the Foundations of Wage Bargaining," Discussion Papers 9616, Exeter University, Department of Economics.
  5. Frank, Jeff, 1985. "Trade Union Efficiency and Overemployment with Seniority Wage Scales," Economic Journal, Royal Economic Society, vol. 95(380), pages 1021-34, December.
  6. Gottfries, N. & Sjostrom, Y., 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Papers 1998-10, Uppsala - Working Paper Series.
  7. Georg Kirchsteiger & Ernst Fehr, 1994. "Insider power, wage discrimination, and fairness," ULB Institutional Repository 2013/5923, ULB -- Universite Libre de Bruxelles.
  8. Burda, Michael C, 1992. " A Note on Firing Costs and Severance Benefits in Equilibrium Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(3), pages 479-89.
  9. Frank, Jeff & Malcomson, James M., 1994. "Trade unions and seniority employment rules," European Economic Review, Elsevier, vol. 38(8), pages 1595-1611, October.
  10. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  11. Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "On-the-Job Training and the Effects of Insider Power," IZA Discussion Papers 586, Institute for the Study of Labor (IZA).
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