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Downward Wage Rigidity in a Model of Equal Treatment Contracting *
Author(s) -
Martins Pedro,
Snell Andy,
Thomas Jonathan P.
Publication year - 2010
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2010.01628.x
Subject(s) - economics , rigidity (electromagnetism) , unemployment , wage , certainty , involuntary unemployment , incentive , labour economics , efficiency wage , productivity , microeconomics , macroeconomics , structural engineering , epistemology , engineering , philosophy
Following insights by Bewley (1999a), this paper analyses a model with downward rigidities in which firms cannot pay discriminately based on year of entry to the firm, and develops an equilibrium model of wages and unemployment. We solve for the dynamics of wages and unemployment under conditions of downward wage rigidity, where forward‐looking firms take into account these constraints. We show that there is a frontloading incentive that leads to a simple solution in the case of certainty. Using productivity data from the postwar US economy, we analyse the ability of the model to match certain stylised labour market facts.