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Labour Contracts, Equal Treatment and Wage-Unemployment Dynamics

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Abstract

This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics and unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match actual unemployment and wage series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting.

Suggested Citation

  • Andy Snell & Jonathan Thomas, 2006. "Labour Contracts, Equal Treatment and Wage-Unemployment Dynamics," Edinburgh School of Economics Discussion Paper Series 144, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:144
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    Cited by:

    1. Fongoni, Marco & Dickson, Alex, 2015. "A Theory of Wage Setting Behavior," SIRE Discussion Papers 2015-57, Scottish Institute for Research in Economics (SIRE).
    2. Jonathan P. Thomas & Tim Worrall, 2007. "Limited Commitment Models Of The Labour Market," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 750-773, November.
    3. Daniel Schaefer & Carl Singleton, 2020. "Nominal Wage Adjustments and the Composition of Pay: New Evidence from Payroll Data," Economics Discussion Papers em-dp2020-01, Department of Economics, University of Reading.
    4. Menzio, Guido & Moen, Espen R., 2010. "Worker replacement," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 623-636, September.
    5. Fongoni, Marco, 2024. "Does pay inequality affect worker effort? An assessment of experimental designs and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 697-716.
    6. Andrew Snell & Heiko Stuber & Jonathan Thomas, 2018. "Downward Real Wage Rigidity and Equal Treatment Wage Contracts: Theory and Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 265-284, October.
    7. Dickson, Alex & Fongoni, Marco, 2019. "Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 409-429.
    8. Michael W. L. Elsby & Gary Solon, 2019. "How Prevalent Is Downward Rigidity in Nominal Wages? International Evidence from Payroll Records and Pay Slips," Journal of Economic Perspectives, American Economic Association, vol. 33(3), pages 185-201, Summer.
    9. Daniel Schaefer & Carl Singleton, 2023. "The Extent of Downward Nominal Wage Rigidity: New Evidence from Payroll Data," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 60-76, December.
    10. Michael W. L. Elsby & Donggyun Shin & Gary Solon, 2016. "Wage Adjustment in the Great Recession and Other Downturns: Evidence from the United States and Great Britain," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 249-291.
    11. Andy Snell & Pedro Martins & Heiko Stüber & Jonathan P. Thomas, 2018. "Bias in Returns to Tenure When Firm Wages and Employment Comove: A Quantitative Assessment and Solution," Journal of Labor Economics, University of Chicago Press, vol. 36(1), pages 47-74.
    12. Forth, John & Singleton, Carl & Bryson, Alex & Phan, Van & Ritchie, Felix & Whittard, Damian, 2024. "The Impact of a Rising Wage Floor on Labour Mobility across Firms," IZA Discussion Papers 17132, Institute of Labor Economics (IZA).
    13. Snell, Andy & Stüber, Heiko & Thomas, Jonathan P., 2024. "Job security, asymmetric information, and wage rigidity," European Economic Review, Elsevier, vol. 161(C).
    14. Fongoni, Marco, 2024. "Does pay inequality affect worker effort? An assessment of experimental designs and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 697-716.
    15. Marco Fongoni, 2018. "Workers' reciprocity and the (ir)relevance of wage cyclicality for the volatility of job creation," Working Papers 1809, University of Strathclyde Business School, Department of Economics.
    16. Michael W. L. Elsby & Ryan Michaels & David Ratner, 2015. "The Beveridge Curve: A Survey," Journal of Economic Literature, American Economic Association, vol. 53(3), pages 571-630, September.
    17. Jonathan Thomas & Andy Snell, 2007. "Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting," CDMA Conference Paper Series 0708, Centre for Dynamic Macroeconomic Analysis.
    18. Pedro S. Martins & Gary Solon & Jonathan Thomas, 2010. "Measuring What Employers Really Do about Entry Wages over the Business Cycle," NBER Working Papers 15767, National Bureau of Economic Research, Inc.
    19. Gebauer Markus, 2023. "Job Protection — It is Good to be an Insider," IZA Journal of Labor Policy, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 13(1), pages 1-50, January.

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    More about this item

    Keywords

    labor contracts; business cycle; unemployment; equal treatment; cohort effects;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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