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A Fair Wage Explanation of Labour Market Volatility

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Abstract

This paper proposes an explanation for observed differences in the business cycle volatility of employment and unemployment across a sample of OECD countries. Using an incomplete markets variant of the fair wage real business cycle model, increases in the gross replacement rate of public unemployment insurance are shown to increase the volatility of employment, and decrease the volatility of real wages, ceteris paribus. For a sample of 14 OECD countries over the period 1985-2005, the gross replacement rate is found to be positively correlated with the business cycle volatility of hours worked, lending support to the argument. A secondary contribution, which may be of some use in the incomplete markets literature, is the simple manner in which unemployment is endogenised in the model.

Suggested Citation

  • Robert Jump, 2014. "A Fair Wage Explanation of Labour Market Volatility," Studies in Economics 1413, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:1413
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    References listed on IDEAS

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    Cited by:

    1. Jan Bruha & Jiri Polansky, 2015. "Empirical Analysis of Labor Markets over Business Cycles: An International Comparison," Working Papers 2015/15, Czech National Bank, Research Department.

    More about this item

    Keywords

    Fair Wages; Unemployment; Incomplete Markets;

    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
    • 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
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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