Unemployment Benefits, Contract Length and Nominal Wage Flexibility

Lars Calmfors and Åsa Johansson

No 514, CESifo Working Paper Series from CESifo

Abstract: We show in a union-bargaining model 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 highter expected real wages and hence higher expected unemployment than short-term contracts. Therefore lower benefits reduce the expected utility gross of contract costs of a union member more with long-term than with short-term contracts and thus create an incentive for shorter contracts. Incentives for employers work in the same direction. Lower taxes associated with lower benefits also tend to make short-term contracts more attractive.

Keywords: Nominal wage flexibility; contracts length; macroeconomic fluctuations; unemployment benefits (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (3)

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