Working Paper: CEPR ID: DP3472
Authors: Pilar Diaz-Vazquez; Dennis Snower
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: business cycles; employment; hiring and firing costs; insiders; wages
JEL Codes: E24; J31; J32; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in insider wages (J31) | increase in firing rates during recessions (E32) |
| increase in insider wages (J31) | decrease in employment during recessions (J63) |
| increase in insider wages (J31) | no change in hiring during booms (J23) |
| insider power (D73) | decrease in average employment over both recessions and booms (E32) |
| higher firing rates during downturns (E32) | decrease in average employment (J63) |