Fair Pay and a Wagebill Argument for Wage Rigidity and Excessive Employment Variability

36 Pages Posted: 14 Nov 2000

See all articles by Jonathan Thomas

Jonathan Thomas

University of Edinburgh - Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2000

Abstract

This paper considers a two-period optimal contracting model in which firms make new hires in the second period subject to the constraint that they cannot pay discriminate either against or in favour of the new hires. Under an assumption on the information available to workers, it is shown that wages are less flexible than needed for efficient employment levels, with the result that too few hires are made in bad states of the world. Unemployment is involuntary. In an extension to the model, there may also be involuntary and excessive layoffs in some states of the world.

Keywords: Implicit Contract Theory, Wage Rigidity, Involuntary Unemployment

JEL Classification: J41, J63

Suggested Citation

Thomas, Jonathan P., Fair Pay and a Wagebill Argument for Wage Rigidity and Excessive Employment Variability (January 2000). Available at SSRN: https://ssrn.com/abstract=239808 or http://dx.doi.org/10.2139/ssrn.239808

Jonathan P. Thomas (Contact Author)

University of Edinburgh - Economics ( email )

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HOME PAGE: http://www.st-andrews.ac.uk/~jpt/

CESifo (Center for Economic Studies and Ifo Institute)

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HOME PAGE: http://www.cesifo.de

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