Working Paper: NBER ID: w15983
Authors: Guido Menzio; Espen R. Moen
Abstract: Consider a labor market in which firms want to insure existing employees against income fluctuations and, simultaneously, want to recruit new employees to fill vacant jobs. Firms can commit to a wage policy, i.e. a policy that specifies the wage paid to their employees as a function of tenure, productivity and other observables. However, firms cannot commit to employ workers. In this environment, the optimal wage policy prescribes not only a rigid wage for senior workers, but also a downward rigid wage for new hires. The downward rigidity in the hiring wage magnifies the response of unemployment to negative shocks.
Keywords: Labor Market; Wage Rigidity; Unemployment; Vacancies
JEL Codes: E24; E32; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| worker replacement problem (J54) | wage policies do not respond optimally to productivity shocks (J38) |
| positive productivity shocks (O49) | wage policies maintain the same wage for senior workers (J31) |
| negative productivity shocks (O49) | optimal wage policy prescribes a common wage for senior and new workers (J38) |
| worker replacement problem (J54) | downward rigidity in wages offered to new hires (J31) |
| downward rigidity in wages (J31) | increase in unemployment in response to negative shocks (J64) |
| downward rigidity in wages (J31) | decline in vacancies in response to negative shocks (J69) |
| negative productivity shocks (O49) | rigidity amplifies unemployment and declines in vacancies (J69) |