Working Paper: CEPR ID: DP4444
Authors: Tito Boeri; Michael C. Burda
Abstract: Firing frictions and renegotiation costs affect worker and firm preferences for rigid wages versus individualized Nash bargaining in a standard model of equilibrium unemployment, in which workers vary by observable skill. Rigid wages permit savings on renegotiation costs and prevent workers from exploiting the firing friction. For standard calibrations, the model can account for political support for wage rigidity by both workers and firms, especially in labour markets for intermediate skills. The firing friction is necessary for this effect, and reinforces the impact of both turbulence and other labour market institutions on preferences for rigid wages.
Keywords: equilibrium unemployment; firing taxes; job protection; renegotiation costs; wage rigidities
JEL Codes: D70; J50; J60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firing frictions (J63) | preferences for rigid wages (J38) |
| renegotiation costs (G32) | preferences for rigid wages (J38) |
| rigid wages (J31) | job creation (J68) |
| rigid wages (J31) | job destruction for low-skilled workers (F66) |
| rigid wages (J31) | job creation for intermediate-skilled workers (J68) |
| firing taxes (H29) | support for rigid wages (E64) |
| firing frictions + renegotiation costs (L14) | support for rigid wages (E64) |