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Wage Adjustment in Efficient Long-Term Employment Relationships

Author

Listed:
  • Michael W. L. Elsby
  • Axel Gottfries
  • Pawel M. Krolikowski
  • Gary Solon

Abstract

We present a model in which efficient long-term employment relationships are sustained by wage adjustments prompted by productivity shocks and outside job offers. These wage adjustments occur only sporadically, due to the presence of renegotiation costs. The model is amenable to analytical solution, yielding new insights for several labor market phenomena, including: (1) key features of empirical distributions of changes in pay among job stayers; (2) a near-"memorylessness" property in wage dynamics whereby hiring wages have only limited influence on later wages and allocation decisions; and (3) a crucial role for recruitment and retention bonuses in sustaining efficient employment relationships.

Suggested Citation

  • Michael W. L. Elsby & Axel Gottfries & Pawel M. Krolikowski & Gary Solon, 2024. "Wage Adjustment in Efficient Long-Term Employment Relationships," NBER Working Papers 33149, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33149
    Note: EFG LS ME
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    Cited by:

    1. is not listed on IDEAS
    2. Bertheau, Antoine & Kudlyak, Marianna & Larsen, Birthe & Bennedsen, Morten, 2025. "Why Firms Lay Off Workers Instead of Cutting Wages: Evidence From Linked Survey-Administrative Data," Discussion Paper Series in Economics 4/2025, Norwegian School of Economics, Department of Economics.

    More about this item

    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
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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