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Employment Fluctuations with Downward Wage Rigidity

Author

Listed:
  • James Costain

    (Bank of Spain)

  • Marcel Jansen

    () (Economics Universidad Carlos III de Madrid)

Abstract

This paper considers a dynamic matching model with imperfectly observable worker effort as in Shapiro and Stiglitz (1994). In our economy the no-shirking condition endogenously imposes real wage rigidity on the matching market. This generates "contractual fragility" and inefficient separations as in Ramey and Watson (1997). Nonetheless, our main finding is that imperfectly observable effort smoothes job destruction over the cycle. The reason is that firms are forced, in good states, to terminate some marginal jobs that they cannot commit to maintain in bad states. This time-inconsistency problem casts doubts on the importance of inefficient churning as an explanation of observed employment fluctuations. On the other hand, the no-shirking condition implies that the surplus share of firms is pro-cyclical, which can amplify fluctuations in job creation. Thus, our model is consistent with recent evidence that job creation is more important than job destruction in driving labor market fluctuations, and it therefore also tends to generate a robust Beveridge curve.

Suggested Citation

  • James Costain & Marcel Jansen, 2006. "Employment Fluctuations with Downward Wage Rigidity," Computing in Economics and Finance 2006 204, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:204
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    File URL: http://repec.org/sce2006/up.8718.1140618479.pdf
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    References listed on IDEAS

    as
    1. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
    2. Robert Shimer, 2004. "The Consequences of Rigid Wages in Search Models," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 469-479, 04/05.
    3. Garey Ramey & Joel Watson, 1997. "Contractual Fragility, Job Destruction, and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 873-911.
    4. Wouter J. Den Haan & Garey Ramey & Joel Watson, 1999. "Contract-theoretic approaches to wages and displacement," Review, Federal Reserve Bank of St. Louis, issue May, pages 55-68.
    5. Kimball, Miles S, 1994. "Labor-Market Dynamics When Unemployment is a Worker Discipline Device," American Economic Review, American Economic Association, vol. 84(4), pages 1045-1059, September.
    6. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    7. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier.
    8. Rustichini, Aldo, 1998. "Dynamic Programming Solution of Incentive Constrained Problems," Journal of Economic Theory, Elsevier, vol. 78(2), pages 329-354, February.
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    Citations

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    Cited by:

    1. repec:ebl:ecbull:v:10:y:2008:i:1:p:1-10 is not listed on IDEAS
    2. Katarzyna Budnik, 2012. "Do those who stay work less? On the impact of emigration on the measured TFP in Poland," NBP Working Papers 113, Narodowy Bank Polski, Economic Research Department.
    3. Julien Champagne, 2015. "The Carrot and the Stick: The Business Cycle Implications of Incentive Pay in the Labor Search Model," Staff Working Papers 15-35, Bank of Canada.
    4. Norikazu Tawara, 2008. "No-shirking Conditions in Frictional Labor Markets," Economics Bulletin, AccessEcon, vol. 10(1), pages 1-10.
    5. Kfir Eliaz & Ran Spiegler, 2014. "Reference Dependence and Labor Market Fluctuations," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 159-200.
    6. Lunardelli, Andre, 2014. "Fairness and the disinflation puzzle," Economics Discussion Papers 2014-32, Kiel Institute for the World Economy (IfW).
    7. repec:bla:ecinqu:v:55:y:2017:i:3:p:1336-1349 is not listed on IDEAS

    More about this item

    Keywords

    Job matching; wage rigidity; efficiency wages; contractual fragility;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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