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

  • Jonathan P. Thomas

    (University of St. Andrews)

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.

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File URL: http://econwpa.repec.org/eps/lab/papers/0004/0004004.pdf
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Paper provided by EconWPA in its series Labor and Demography with number 0004004.

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Length: 35 pages
Date of creation: 13 Jun 2000
Date of revision:
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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
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  4. Oswald, Andrew J., 1993. "Efficient contracts are on the labour demand curve : Theory and facts," Labour Economics, Elsevier, vol. 1(1), pages 85-113, June.
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  7. Note: For best results & the figures should be printed on a non-Postscript printer. Hoynes & H., . "The Employment, Earnings, and Income of Less-Skilled Workers over the Business Cycle," Institute for Research on Poverty Discussion Papers 1199-99, University of Wisconsin Institute for Research on Poverty.
  8. V.V. Chari, 1980. "Involuntary Unemployment and Implicit Contracts," Discussion Papers 459, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Gottfries, Nils & Horn, Henrik, 1987. "Wage Formation and the Persistence of Unemployment," Economic Journal, Royal Economic Society, vol. 97(388), pages 877-84, December.
  10. Gottfries, Nils & Sjöström, Tomas, 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Working Paper Series 1998:10, Uppsala University, Department of Economics.
  11. 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.
  12. Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Wiley Blackwell, vol. 47(2), pages 321-38, January.
  13. Richard J. Arnott & Arthur Hosios & Joseph Stiglitz, 1987. "Implicit Contracts, Labor Mobility and Unemployment," NBER Working Papers 2316, National Bureau of Economic Research, Inc.
  14. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 252-70, April.
  15. Oswald, Andrew J, 1986. "Unemployment Insurance and Labor Contracts under Asymmetric Information: Theory and Facts," American Economic Review, American Economic Association, vol. 76(3), pages 365-77, June.
  16. Albrecht, James W & Axell, Bo, 1983. "An Equilibrium Model of Search Unemployment," Working Paper Series 99, Research Institute of Industrial Economics.
  17. Lorne Carmichael, 1983. "Firm-Specific Human Capital and Promotion Ladders," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 251-258, Spring.
  18. Gautier, P.A. & van den Berg, G. & van Ours, J.C. & Ridder, G., 1999. "Separations at the Firm Level," Discussion Paper 1999-17, Tilburg University, Center for Economic Research.
  19. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  20. Kåre Johansen, . "Nonlinear Wage Responses to Internal and External Factors," Working Paper Series 0902, Department of Economics, Norwegian University of Science and Technology, revised 25 Aug 2002.
  21. Campbell, Carl M, III & Kamlani, Kunal S, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 759-89, August.
  22. Lindbeck, Assar & Snower, Dennis J., 1987. "Union activity, unemployment persistence and wage-employment ratchets," European Economic Review, Elsevier, vol. 31(1-2), pages 157-167.
  23. Hosios, Arthur J, 1986. "Layoffs, Recruitment, and Interfirm Mobility," Journal of Labor Economics, University of Chicago Press, vol. 4(4), pages 473-502, October.
  24. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-07, May.
  25. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  26. John Moore, 2007. "Stable Sets And Steady Wages," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 721-730, November.
  27. Joseph E. Stiglitz, 1984. "Theories of Wage Rigidity," NBER Working Papers 1442, National Bureau of Economic Research, Inc.
  28. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
  29. Gottfries, N. & Westermak, A., 1995. "Nominal Wage Contracts and the Persistent Effects of Monetary Policy," Papers 1995-22, Uppsala - Working Paper Series.
  30. Ernst FEHR & Simon GÄCHTER & Georg KIRCHSTEIGER, 1994. "Reciprocal Fairness and Noncompensating Wage Differentials," Vienna Economics Papers vie9401, University of Vienna, Department of Economics.
  31. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
  32. Bewley, Truman F., 1998. "Why not cut pay?," European Economic Review, Elsevier, vol. 42(3-5), pages 459-490, May.
  33. Kahn, Charles M. & Green, Jerry, 1983. "Wage-Employment Contracts," Scholarly Articles 3203642, Harvard University Department of Economics.
  34. Alan Manning, 1994. "Labour Markets with Company Wage Policies," CEP Discussion Papers dp0214, Centre for Economic Performance, LSE.
  35. Burda, Michael C, 1990. "Membership, Seniority and Wage-Setting in Democratic Labour Unions," Economica, London School of Economics and Political Science, vol. 57(228), pages 455-66, November.
  36. Blinder, Alan S & Choi, Don H, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1003-15, November.
  37. Felix R. FitzRoy, 1999. "Monopsony, Efficiency Wages and Minimum Wages," CRIEFF Discussion Papers 9921, Centre for Research into Industry, Enterprise, Finance and the Firm.
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