Employment Fluctuations with Downward Wage Rigidity

James Costain and Marcel Jansen

No 204, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: This paper considers a dynamic matching model with imperfectly observable worker effort as in Shapiro and Stiglitz (1994). In our economy the no-shirking condition endogenously imposes real wage rigidity on the matching market. This generates "contractual fragility" and inefficient separations as in Ramey and Watson (1997). Nonetheless, our main finding is that imperfectly observable effort smoothes job destruction over the cycle. The reason is that firms are forced, in good states, to terminate some marginal jobs that they cannot commit to maintain in bad states. This time-inconsistency problem casts doubts on the importance of inefficient churning as an explanation of observed employment fluctuations. On the other hand, the no-shirking condition implies that the surplus share of firms is pro-cyclical, which can amplify fluctuations in job creation. Thus, our model is consistent with recent evidence that job creation is more important than job destruction in driving labor market fluctuations, and it therefore also tends to generate a robust Beveridge curve.

Keywords: Job matching; wage rigidity; efficiency wages; contractual fragility (search for similar items in EconPapers)
JEL-codes: C78 E24 E32 J64 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:204

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