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Can Insider Power Affect Employment?

Author

Listed:
  • Diaz-Vazquez, Pilar

    (University of Santiago de Compostela, Spain)

  • Snower, Dennis J.

    (Hertie School of Governance)

Abstract

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.

Suggested Citation

  • Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "Can Insider Power Affect Employment?," IZA Discussion Papers 506, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp506
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    References listed on IDEAS

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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. 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 479-489.
    3. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 699-726.
    4. Gottfries, Nils & Sjostrom, Tomas, 2000. " Insider Bargaining Power, Starting Wages and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 669-688, December.
    5. Frank, Jeff, 1985. "Trade Union Efficiency and Overemployment with Seniority Wage Scales," Economic Journal, Royal Economic Society, vol. 95(380), pages 1021-1034, December.
    6. Manzini, P. & Snower, D.J., 1996. "On the Foundations of Wage Bargaining," Discussion Papers 9616, University of Exeter, Department of Economics.
    7. Vetter, Henrik & Andersen, Torben M, 1994. "Do Turnover Costs Protect Insiders?," Economic Journal, Royal Economic Society, vol. 104(422), pages 124-130, January.
    8. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
    9. Fehr, Ernst & Kirchsteiger, Georg, 1994. "Insider Power, Wage Discrimination and Fairness," Economic Journal, Royal Economic Society, vol. 104(424), pages 571-583, May.
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    11. repec:exe:wpaper:96/16 is not listed on IDEAS
    12. Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "On-the-Job Training and the Effects of Insider Power," IZA Discussion Papers 586, Institute of Labor Economics (IZA).
    13. Nils Gottfries & Tomas Sjostrom, 2000. "Insider Bargaining Power, Starting Wages and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 669-688, December.
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    Cited by:

    1. Brown, Alessio & Merkl, Christian & Snower, Dennis, 2015. "An Incentive Theory Of Matching," Macroeconomic Dynamics, Cambridge University Press, vol. 19(3), pages 643-668, April.
    2. Diaz-Vazquez, Pilar & Snower, Dennis, 2006. "On-the-Job Learning and the Effects of Insider Power," Labour Economics, Elsevier, vol. 13(3), pages 317-341, June.
    3. Chen, Yu-Fu & Funke, Michael, 2009. "China's new Labour Contract Law: No harm to employment?," China Economic Review, Elsevier, vol. 20(3), pages 558-572, September.
    4. Chen, Yu-Fu & Funke, Michael, 2008. "Product market competition, investment and employment-abundant versus job-poor growth: A real options perspective," European Journal of Political Economy, Elsevier, vol. 24(1), pages 218-238, March.
    5. Diaz-Vazquez, Pilar & Snower, Dennis J., 2003. "On-the-Job Training, Firing Costs and Employment," IZA Discussion Papers 910, Institute of Labor Economics (IZA).
    6. Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "On-the-Job Training and the Effects of Insider Power," IZA Discussion Papers 586, Institute of Labor Economics (IZA).
    7. Jo Seldeslachts, 2008. "Synchronising Deregulation In Product And Labour Markets," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(5), pages 591-617, November.
    8. Jo Seldeslachts, 2002. "Interactions Between Product and Labour Market Reforms," UFAE and IAE Working Papers 519.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).

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    More about this item

    Keywords

    insider power; employment; labor demand; wage differentials;
    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
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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