Unemployment Benefits, Contract Length and Nominal Wage Flexibility

Lars Calmfors and Åsa Johansson

Scandinavian Journal of Economics, 2004, vol. 106, issue 1, 23-44

Abstract: In a bargaining model, we show that a decrease in the unemployment benefit level increases not only equilibrium employment, but also nominal wage flexibility, and thus reduces employment variations in the case of nominal shocks. Long‐term wage contracts lead to higher expected real wages and hence higher expected unemployment than short‐term contracts. Therefore, a decrease in the benefit level reduces the expected utility gross of contract costs of a union member more with long‐term than with short‐term contracts, thereby creating an incentive for shorter contracts. Incentives for employers are shown to change in the same direction.

Date: 2004
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