Wage Flexibility in Ongoing Employment Relations - An Experiment With a Stochastic Labor Market

24 Pages Posted: 23 Oct 2007 Last revised: 4 Nov 2007

See all articles by Siegfried Berninghaus

Siegfried Berninghaus

Institut fuer Statistik und Mathematische Wirtscha

Sabrina Bleich

University of Karlsruhe

Werner Guth

Max Planck Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 10, 2007

Abstract

Facing a stochastic market wage, which is independent of their own hiring policy, employers offer contracts specifying fixed wage, revenue share and employment duration. In ongoing employment relations it depends on the treatment whether fixed wages can be only increased or also decreased. Will the uncertainty of the future market wage and less wage flexibility lead to temporary employment? And, if not, will employers adjust wages to changing market wages and will workers in ongoing employment relations react to wage decreases via effort choices? Our results partly question empirical claims, e.g. of Bewley (1995), and confirm the tendency to establish ongoing employment relations. Granting more wage flexibility to employers altogether questions rather than enhances efficiency since it induces opportunistic wage cuts to which employees react with lower efforts.

Keywords: noncooperative game, labor contracts, labor market flexibility, principal-agent theory, experimental economics

JEL Classification: C72, C90, F16, J21, J24, L10

Suggested Citation

Berninghaus, Siegfried and Bleich, Sabrina and Güth, Werner, Wage Flexibility in Ongoing Employment Relations - An Experiment With a Stochastic Labor Market (October 10, 2007). Jena Economic Research Paper No. 2007-072. Available at SSRN: https://ssrn.com/abstract=1023886 or http://dx.doi.org/10.2139/ssrn.1023886

Siegfried Berninghaus (Contact Author)

Institut fuer Statistik und Mathematische Wirtscha ( email )

Building 20.21
Universitaet Karlsruhe Gebaeude 20.21
76128 Karlsruhe
Germany

Sabrina Bleich

University of Karlsruhe ( email )

Building 20.21
76128 Karlsruhe
Germany

Werner Güth

Max Planck Institute of Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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