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Productivity Shocks, Dynamic Contracts and Income Uncertainty

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  • Thibaut Lamadon

    (University College London)

Abstract

This paper examines how employer and worker specific productivity shocks transmit to wage and employment in an economy with search frictions and firm commitment. I develop an equilibrium search model with worker and firm shocks and characterize the optimal contract offered by competing firms to attract and retain workers. In equilibrium risk-neutral firms offer risk-averse workers contingent contracts where payments are back-loaded in good times and front-loaded in bad ones: the combination of search frictions, productivity shocks and private worker actions results in partial insurance against firm and worker shocks. I estimate the model on matched employer-employee data from Sweden, using information about co-workers to separately identify firm specific and worker specific earnings shocks. Preliminary estimates suggest that firm level shocks are responsible for about 20% of permanent income fluctuations, the remaining being accounted for by individual level shocks (30% to 40%) and by job mobility (40% to 50%). The wage contract attenuates 80% of individual productivity shocks but passes through 30% of firm productivity fluctuations.

Suggested Citation

  • Thibaut Lamadon, 2014. "Productivity Shocks, Dynamic Contracts and Income Uncertainty," 2014 Meeting Papers 243, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:243
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    References listed on IDEAS

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    1. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2005. "Insurance within the Firm," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1054-1087, October.
    2. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
    3. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 315-333.
    4. Koeppl Thorsten V., 2006. "Differentiability of the Efficient Frontier when Commitment to Risk Sharing is Limited," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-6, April.
    5. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Wage paradox at the industry level
      by ? in FRED blog on 2016-03-17 18:00:06

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    Cited by:

    1. Chinhui Juhn & Kristin McCue & Holly Monti & Brooks Pierce, 2018. "Firm Performance and the Volatility of Worker Earnings," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 99-131.
    2. Youngmin Park & Youngki Shin & Lance Lochner, 2017. "Earnings Dynamics and Returns to Skills," 2017 Meeting Papers 166, Society for Economic Dynamics.
    3. repec:aea:jeclit:v:55:y:2017:i:2:p:493-544 is not listed on IDEAS
    4. Orazio Attanasio & Corina Mommaerts & Costas Meghir, 2015. "Insurance in Extended Family Networks," Cowles Foundation Discussion Papers 1996R, Cowles Foundation for Research in Economics, Yale University, revised Jun 2018.
    5. Andreas Gulyas, 2018. "Identifying Labor Market Sorting with Firm Dynamics," 2018 Meeting Papers 856, Society for Economic Dynamics.
    6. Julio Blanco & Gaston Navarro, 2016. "The Unemployment Accelerator," CESifo Working Paper Series 6248, CESifo Group Munich.
    7. Atsuko Tanaka, "undated". "Employer Loyalty, Training, and Female Labor Supply," Working Papers 2015-27, Department of Economics, University of Calgary, revised 25 Mar 2016.
    8. Rasmus Lentz, 2014. "Optimal Employment Contracts with Hidden Search," NBER Working Papers 19988, National Bureau of Economic Research, Inc.
    9. Katsuya Takii, 2014. "Advertisement versus Motivation in Competitive Search Equilibrium," OSIPP Discussion Paper 14E009, Osaka School of International Public Policy, Osaka University.

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