Unemployment Benefits, Contract Length and Nominal Wage Flexibility
37 Pages Posted: 9 Aug 2001
Date Written: June 2001
We show in a union-bargaining model that a decrease in the unemployment benefit level increases not only equilibrium employment, but also nominal wage flexibility, and thus reduces employment variations in the case of nominal shocks. Long-term wage contracts lead to higher expected real wages and, hence, higher expected unemployment than short-term contracts. Therefore lower benefits reduce the expected utility gross of contract costs of a union member more with long-term than with short-term contracts and thus create an incentive for shorter contracts. Incentives for employers work in the same direction. Lower taxes associated with lower benefits also tend to make short-term contracts more attractive.
Keywords: Nominal Wage Flexibility, Contracts Length, Macroeconomic Fluctuations, Unemployment Benefits
JEL Classification: E24, E32, J64, J65
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