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Labor Contracts, Equal Treatment and Wage-Unemployment Dynamics

  • Andy Snell
  • Jonathan Thomas

This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics and unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match actual unemployment and wage series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0603.

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Date of creation: Sep 2006
Date of revision:
Handle: RePEc:san:cdmacp:0603
Contact details of provider: Postal: Department of Economics, University of St. Andrews, Fife KY16 9AL
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  1. Louis N. Christofides & Thanasis Stengos, 2003. "Wage Rigidity in Canadian Collective Bargaining Agreements ," University of Cyprus Working Papers in Economics 1-2003, University of Cyprus Department of Economics.
  2. Agell, Jonas & Lundborg, Per, 1999. "Survey Evidence on Wage Rigidity and Unemployment: Sweden in the 1990s," Working Paper Series 1999:12, Uppsala University, Department of Economics.
  3. McDonald, J.T. & Worswick, C., 1997. "Wages, Implicit Contracts and the Business Cycle: Evidence from Canadian Micro Data," Department of Economics - Working Papers Series 588, The University of Melbourne.
  4. Truman F. Bewley, 1999. "Work Motivation," Cowles Foundation Discussion Papers 1209, Cowles Foundation for Research in Economics, Yale University.
  5. Truman Bewley, 1999. "Work motivation," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-49.
  6. Lorne Carmichael, 1983. "Firm-Specific Human Capital and Promotion Ladders," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 251-258, Spring.
  7. Paul J. Devereux & Robert A. Hart, 2005. "The spot market matters : evidence on implicit contracts from Britain," Open Access publications 10197/741, School of Economics, University College Dublin.
  8. Michael W. L. Elsby, 2005. "Evaluating the economic significance of downward nominal wage rigidity," LSE Research Online Documents on Economics 19882, London School of Economics and Political Science, LSE Library.
  9. 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 665-88, August.
  10. repec:tpr:qjecon:v:109:y:1994:i:4:p:921-55 is not listed on IDEAS
  11. John Moore, 2007. "Stable Sets And Steady Wages," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 721-730, November.
  12. Gottfries, N. & Sjostrom, Y., 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Papers 1998-10, Uppsala - Working Paper Series.
  13. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 252-70, April.
  14. Shin, Donggyun & Shin, Kwanho, 2008. "Why Are The Wages Of Job Stayers Procyclical?," Macroeconomic Dynamics, Cambridge University Press, vol. 12(01), pages 1-21, February.
  15. Bengt Holmstrom, 1980. "Equilibrium Long-Term Labor Contracts," Discussion Papers 414R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  16. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc.
  17. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
  18. Jonathan P. Thomas, 2005. "Fair pay and a Wage-Bill Argument for low Real Wage Cyclicality and Excessive Employment Variability," Economic Journal, Royal Economic Society, vol. 115(506), pages 833-859, October.
  19. Carruth, Alan A & Oswald, Andrew J, 1987. "On Union Preferences and Labour Market Models: Insiders and Outsi ders," Economic Journal, Royal Economic Society, vol. 97(386), pages 431-45, June.
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