Can Insider Power Affect Employment?

Dennis Snower and Pilar Diaz-Vazquez

No 3472, CEPR Discussion Papers from Centre for Economic Policy Research

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
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Journal Article: Can Insider Power Affect Employment? (2003)
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