Premium
A COMPETITIVE MODEL OF WORKER REPLACEMENT AND WAGE RIGIDITY
Author(s) -
Snell Andy,
Thomas Jonathan P.,
Wang Zhewei
Publication year - 2015
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12110
Subject(s) - commit , economics , wage , unemployment , hoarding (animal behavior) , rigidity (electromagnetism) , labour economics , incentive , efficiency wage , microeconomics , macroeconomics , ecology , foraging , structural engineering , database , biology , computer science , engineering
We adapt the models of Menzio and Moen (2010) and Snell and Thomas (2010) to consider a labor market in which firms can commit to wage contracts but cannot commit not to replace incumbent workers. Workers are risk averse, so that there exists an incentive for firms to smooth wages. Real wages respond in a highly nonlinear manner to shocks, exhibiting downward rigidity, and magnifying the response of unemployment to negative shocks. We also consider layoffs and show that for a range of shocks labor hoarding occurs while wages are cut. We argue these features are consistent with recent evidence . ( JEL E32, J41)