Can Insider Power Affect Employment?

Dennis Snower and Pilar Diaz-Vazquez

No 3472, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Do firms reduce employment when their insiders (established, incumbent employees) claim higher wages? The conventional answer in the theoretical literature is that insider power has no influence on employment, provided that the newly hired employees (entrants) receive their reservation wages. The reason given is that an increase in insider wages gives rise to a counterveiling fall in reservation wages, leaving the present value of wage costs unchanged. Our analysis contradicts this conventional answer. We show that, in the context of a stochastic model of the labor market, an increase in insider wages promotes firing in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment.

Keywords: Employment; Wages; Insiders; Business cycles; Hiring and firing costs (search for similar items in EconPapers)
JEL-codes: E24 J31 J32 J64 (search for similar items in EconPapers)
Date: 2002-07
New Economics Papers: this item is included in nep-lab, nep-ltv and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP3472 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Can Insider Power Affect Employment? (2003)
Working Paper: Can Insider Power Affect Employment? (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3472

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3472

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().