Working Paper: NBER ID: w1359
Authors: Motty Perry; Gary Solon
Abstract: This paper presents a wage bargaining model in which the employer and employee are each uncertain about the other's reservation wage. Under specified circumstances, the model's equilibrium is shown to involve unilateral wage setting and inefficient labor turnover. In addition, aggregate demand shocks affect the equilibrium in a way that produces procyclical quits and countercyclical layoffs.These results are obtained without resorting to assumptions of nominal wage rigidity, long-term contracting, or aggregate price misperceptions.
Keywords: Wage Bargaining; Labor Turnover; Business Cycle; Asymmetric Information
JEL Codes: J31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive aggregate demand shocks (E00) | wage-setting power shifts to employers (J31) |
| wage-setting power shifts to employers (J31) | wage offers lower than the value of the employee's work (J31) |
| wage offers lower than the value of the employee's work (J31) | employees may quit their jobs (J63) |
| Negative aggregate demand shocks (E00) | wage-setting power shifts to employees (J38) |
| wage-setting power shifts to employees (J38) | wage offers above their best alternative wages (J31) |
| wage offers above their best alternative wages (J31) | layoffs (J63) |
| Economic shocks (F69) | labor turnover patterns (J63) |
| Positive aggregate demand shocks (E00) | Procyclical quits (E32) |
| Negative aggregate demand shocks (E00) | Countercyclical layoffs (J63) |