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Fair pay and a Wage-Bill Argument for low Real Wage Cyclicality and Excessive Employment Variability

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  • Jonathan P. Thomas

Abstract

This article 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. In the absence of fully contingent contracts, 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. Copyright 2005 Royal Economic Society.

Suggested Citation

  • Jonathan P. Thomas, 2005. "Fair pay and a Wage-Bill Argument for low Real Wage Cyclicality and Excessive Employment Variability," Economic Journal, Royal Economic Society, vol. 115(506), pages 833-859, October.
    • Handle: RePEc:ecj:econjl:v:115:y:2005:i:506:p:833-859
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    Cited by:

    1. Sheila C. Dow, 2012. "Variety of Methodological Approach in Economics," Palgrave Macmillan Books, in: Foundations for New Economic Thinking, chapter 13, pages 210-230, Palgrave Macmillan.
    2. Andy Snell & Jonathan P. Thomas, 2010. "Labor Contracts, Equal Treatment, and Wage-Unemployment Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 98-127, July.
    3. Snell, Andy & Stüber, Heiko & Thomas, Jonathan P., 2024. "Job security, asymmetric information, and wage rigidity," European Economic Review, Elsevier, vol. 161(C).
    4. Awaya, Yu & Do, Jihwan, 2022. "Incentives under equal-pay constraint and subjective peer evaluation," Games and Economic Behavior, Elsevier, vol. 135(C), pages 41-59.

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