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Fair pay and a Wagebill Argument for Wage Rigidity and Excessive Employment Variability

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  • Jonathan P. Thomas

    (University of St. Andrews)

Abstract

This paper considers a two-period optimal contracting model in which firms make new hires in the second period subject to the constraint that they cannot pay discriminate either against or in favour of the new hires. Under an assumption on the information available to workers, it is shown that wages are less flexible than needed for efficient employment levels, with the result that too few hires are made in bad states of the world. Unemployment is involuntary. In an extension to the model, there may also be involuntary and excessive layoffs in some states of the world.

Suggested Citation

  • Jonathan P. Thomas, 2000. "Fair pay and a Wagebill Argument for Wage Rigidity and Excessive Employment Variability," Labor and Demography 0004004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpla:0004004
    Note: Type of Document - Acrobat PDF; prepared on IBM PC; pages: 35 ; figures: included. pdf file, prepared from sci word
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    References listed on IDEAS

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    More about this item

    Keywords

    implicit contract theory; wage rigidity; involuntary unemployment;
    All these keywords.

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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