Wage Flexibility in Ongoing Employment Relations - An Experiment with a Stochastic Labor Market -

Siegfried K. Berninghaus (), Sabrina Bleich and Werner Gueth ()
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Siegfried K. Berninghaus: Institut fuer Wirtschaftstheorie und Operations Research, University of Karlsruhe
Sabrina Bleich: Institut fuer Wirtschaftstheorie und Operations Research, University of Karlsruhe
Werner Gueth: Max Planck Institute of Economics, Jena, Germany
Authors registered in the RePEc Author Service: Werner Güth ()

No 2007-072, Jena Economics Research Papers from Friedrich-Schiller-University Jena

Abstract: Facing a stochastic market wage, which is independent of their own hiring policy, employers offer contracts specifying ï¬ xed wage, revenue share and employment duration. In ongoing employment relations it depends on the treatment whether ï¬ xed wages can be only increased or also decreased. Will the uncertainty of the future market wage and less wage flexibility lead to temporary employment? And, if not, will employers adjust wages to changing market wages and will workers in ongoing employment relations react to wage decreases via effort choices? Our results partly question empirical claims, e.g. of Bewley (1995), and conï¬ rm the tendency to establish ongoing employment relations. Granting more wage flexibility to employers altogether questions rather than enhances effciency since it induces opportunistic wage cuts to which employees react with lower efforts.

Keywords: noncooperative game; labor contracts; labor market flexibility; principal-agent theory; experimental economics (search for similar items in EconPapers)
JEL-codes: C72 C90 F16 J21 J24 L10 (search for similar items in EconPapers)
Date: 2007-10-10
New Economics Papers: this item is included in nep-exp, nep-gth and nep-lab
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