Employment fluctuations with downward wage rigidity: the role of moral hazard

James Costain and Marcel Jansen

No 632, Working Papers from Banco de España

Abstract: This paper considers a dynamic matching model with imperfectly observable worker effort. In equilibrium, the wage distribution is truncated from below by a no-shirking condition. This downward wage rigidity induces the same type of inefficient churning and "contractual fragility" as in Ramey and Watson (1997). Nonetheless, the surprising lesson of our analysis is that workers' shirking motive reduces the cyclical fluctuations in job destruction, because firms are forced to terminate some marginal jobs in booms which they cannot commit to maintain in recessions. This time-inconsistency problem casts doubt upon the importance of inefficient churning as an explanation of observed employment fluctuations. On the other hand, the no-shirking condition implies that firms' share of surplus is procyclical, 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. Furthermore, unlike most models with endogenous job destruction, we obtain 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)
Pages: 46 pages
Date: 2006-11
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard (2010)
Working Paper: Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0632

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