Wage Adjustment in Efficient Long-Term Employment Relationships

Michael Elsby, Axel Gottfries (), Pawel Krolikowski and Gary Solon
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Axel Gottfries: https://www.ed.ac.uk/profile/axel-gottfries

No 23-23, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We present a model in which efficient long-term employment relationships are sustained by wage adjustments prompted by shocks to idiosyncratic productivity and the arrival of outside job offers. In accordance with casual and formal evidence, these wage adjustments occur only sporadically, due to the presence of renegotiation costs. The model is amenable to analytical solution and yields new insights into a number of labor market phenomena, including: (1) key features of the empirical distributions of changes in pay among job stayers; (2) a property of near-“memorylessness” in wage dynamics that implies that initial hiring wages have only limited influence on later wages and allocation decisions; and (3) a crucial role for nonbase pay—specifically, recruitment and retention bonuses—in sustaining efficient employment relationships.

Keywords: sticky wages; business cycles (search for similar items in EconPapers)
JEL-codes: E24 E3 J3 J6 (search for similar items in EconPapers)
Pages: 58
Date: 2023-10-10
New Economics Papers: this item is included in nep-dge and nep-lma
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Citations: View citations in EconPapers (1)

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Working Paper: Wage Adjustment in Efficient Long-Term Employment Relationships (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:97089

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DOI: 10.26509/frbc-wp-202323

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