Can Insider Power Affect Employment?

Pilar Diaz-Vazquez () and Dennis Snower
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Pilar Diaz-Vazquez: University of Santiago de Compostela, Spain

No 506, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 firming in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment.

Keywords: insider power; employment; labor demand; wage differentials (search for similar items in EconPapers)
JEL-codes: E24 J23 J31 J42 J64 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2002-05
New Economics Papers: this item is included in nep-lab and nep-ltv
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Citations: View citations in EconPapers (2)

Published - published in: German Economic Review, 2003, 4 (2), 139-150

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Journal Article: Can Insider Power Affect Employment? (2003)
Working Paper: Can Insider Power Affect Employment? (2002)
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