Labor Market Dynamics under Long Term Wage Contracting

Leena Rudanko ()
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Leena Rudanko: Boston University

No wp2008-003, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: Recent research seeking to explain the strong cyclicality of US unemployment emphasizes the role of wage rigidity. This paper proposes a micro-founded model of wage rigidity – an equilibrium business cycle model of job search, where risk neutral firms post optimal long-term contracts to attract risk averse workers. Equilibrium contracts feature wage smoothing, limited by the inability of parties to commit to contracts. The model is consistent with aggregate wage data if neither worker nor firm can commit, producing too rigid wages otherwise. Wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment.

Keywords: wage rigidity; unemployment fluctuations; long-term wage contracts; limited commitment; directed search (search for similar items in EconPapers)
JEL-codes: E24 E32 J41 J64 (search for similar items in EconPapers)
Pages: 21
Date: 2008-12
New Economics Papers: this item is included in nep-bec, nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published, Journal of Monetary Economics, 56, 2 (March 2009)

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Related works:
Working Paper: Labor Market Dynamics under Long Term Wage Contracting (2006)
Working Paper: Labor Market Dynamics under Long Term Wage Contracting (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2008-003

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