The dynamics of working hours and wages under implicit contracts

Marco Guerrazzi and Pier Giuseppe Giribone

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we explore the out-of-equilibrium dynamics of working hours and wages in a model economy where workers and firms have agreed upon an implicit contract that smooths long-run consumption. Specifically, we analyse a deterministic and a stochastic framework in which a firm inter-temporally sets its level of labour utilization by considering that workers' earnings tend to adjust in the direction of a fixed level that seeks to stabilize their consumption. Without any uncertainty in labour effectiveness, this theoretical setting may have one, two or no stationary solution. The dynamics of the deterministic economy, however, can be assessed only in the two-solution case and it reveals that wages move counter-cyclically towards the allocation preferred by the firm. Adding uncertainty in labour effectiveness does not overturn the counter-cyclical pattern of wages but is helpful in explaining the wage stickiness observed at the macro level.

Keywords: Implicit contract theory; Consumption smoothing; Out-of-equilibrium dynamics; Optimal Control (search for similar items in EconPapers)
JEL-codes: D86 E24 J41 (search for similar items in EconPapers)
Date: 2019-09-11
New Economics Papers: this item is included in nep-cta, nep-lma and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The dynamics of working hours and wages under implicit contracts (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:95978

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