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Can insider power affect employment?

  • Díaz-Vázquez, Pilar
  • Snower, Dennis J.
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    Do firms reduce employment when their insiders (established, incumbent employees) claim higher wages? The conventional answer in the theoretical literature is that insider power has no influence on employment, provided that the newly hired employees (entrants) receive their reservation wages. The reason given is that an increase in insider wages gives rise to a countervailing fall in reservation wages, leaving the present value of wage costs unchanged. Our analysis contradicts this conventional answer. We show that, in the context of a stochastic model of the labor market, an increase in insider wages promotes firing in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment.

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    File URL: http://econstor.eu/bitstream/10419/2992/1/inspower-23oct02.PDF
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    Paper provided by Kiel Institute for the World Economy (IfW) in its series Open Access Publications from Kiel Institute for the World Economy with number 2992.

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    Date of creation: 2003
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    Handle: RePEc:zbw:ifwkie:2992
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    1. Frank, Jeff & Malcomson, James M., 1994. "Trade unions and seniority employment rules," European Economic Review, Elsevier, vol. 38(8), pages 1595-1611, October.
    2. Gottfries, Nils & Sjöström, Tomas, 1998. "Insider Bargaining Power, Starting Wages, and Involuntary Unemployment," Working Paper Series 1998:10, Uppsala University, Department of Economics.
    3. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
    4. Frank, Jeff, 1985. "Trade Union Efficiency and Overemployment with Seniority Wage Scales," Economic Journal, Royal Economic Society, vol. 95(380), pages 1021-34, December.
    5. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
    6. Vetter, Henrik & Andersen, Torben M, 1994. "Do Turnover Costs Protect Insiders?," Economic Journal, Royal Economic Society, vol. 104(422), pages 124-30, January.
    7. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
    8. Manzini, P. & Snower, D.J., 1996. "On the Foundations of Wage Bargaining," Discussion Papers 9616, Exeter University, Department of Economics.
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