Productivity Shocks, Dynamic Contracts and Income Uncertainty

Thibaut Lamadon

No 243, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: This paper examines how employer and worker specific productivity shocks transmit to wage and employment in an economy with search frictions and firm commitment. I develop an equilibrium search model with worker and firm shocks and characterize the optimal contract offered by competing firms to attract and retain workers. In equilibrium risk-neutral firms offer risk-averse workers contingent contracts where payments are back-loaded in good times and front-loaded in bad ones: the combination of search frictions, productivity shocks and private worker actions results in partial insurance against firm and worker shocks. I estimate the model on matched employer-employee data from Sweden, using information about co-workers to separately identify firm specific and worker specific earnings shocks. Preliminary estimates suggest that firm level shocks are responsible for about 20% of permanent income fluctuations, the remaining being accounted for by individual level shocks (30% to 40%) and by job mobility (40% to 50%). The wage contract attenuates 80% of individual productivity shocks but passes through 30% of firm productivity fluctuations.

Date: 2014
New Economics Papers: this item is included in nep-bec, nep-dge, nep-hrm and nep-lab
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Citations: View citations in EconPapers (14)

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