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Taxes, Risk Aversion and Unemployment Insurance as Causes of Wage Rigidity

Author

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  • Lundborg, Per

    (Trade Union Institute for Economic Research)

Abstract

Recent empirical evidence has shown that nominal wages are more rigid among blue-collar (low income) workers than among white-collar (high income) workers. We show theoretically that employees in crisis-ridden firms will reject wage cut proposals that save jobs if risk aversion is great, replacement rates high and marginal taxes low. These factors for can explain why wage rigidity is less intense among high-income earners than among low-income earners. We argue, that with economic growth nominal wages should become more flexible, since marginal taxes increase, the marginal utility of income drops, normally, replacement rates fall.

Suggested Citation

  • Lundborg, Per, 2000. "Taxes, Risk Aversion and Unemployment Insurance as Causes of Wage Rigidity," Working Paper Series 160, Trade Union Institute for Economic Research.
    • Handle: RePEc:hhs:fiefwp:0160
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    References listed on IDEAS

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    1. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, vol. 85(2), pages 250-254, May.
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    6. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
    7. Anthony Patrick O'Brien, 1989. "A Behavioral Explanation for Nominal Wage Rigidity During the Great Depression," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 719-735.
    8. repec:bla:scandj:v:97:y:1995:i:2:p:295-307 is not listed on IDEAS
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    Cited by:

    1. Arai, Mahmood & Thoursie, Peter Skogman, 2005. "Incentives and selection in cyclical absenteeism," Labour Economics, Elsevier, vol. 12(2), pages 269-280, April.
    2. Strauss, Tove, 2000. "Economic Reforms and the Poor," Working Paper Series 164, Trade Union Institute for Economic Research.
    3. Strauss, Tove, 2000. "Structural Reforms, Uncertainty, and Private Investment," Working Paper Series 165, Trade Union Institute for Economic Research.

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    More about this item

    Keywords

    Wage rigidity; Marginal taxes; Risk aversion; Unemployment;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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