Unemployment Benefits, Contract Length and Nominal Wage Flexibility

22 Pages Posted: 30 Apr 2004

See all articles by Lars Calmfors

Lars Calmfors

Research Institute of Industrial Economics; IIES

Asa Johansson

National Institute of Economic Research - NIER

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Abstract

In a bargaining model, we show 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, a decrease in the benefit level reduces the expected utility gross of contract costs of a union member more with long-term than with short-term contracts, thereby creating an incentive for shorter contracts. Incentives for employers are shown to change in the same direction.

Suggested Citation

Calmfors, Lars and Johansson, Asa, Unemployment Benefits, Contract Length and Nominal Wage Flexibility. The Scandinavian Journal of Economics, Vol. 106, No. 1, pp. 23-44, March 2004. Available at SSRN: https://ssrn.com/abstract=537948

Lars Calmfors (Contact Author)

Research Institute of Industrial Economics ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden
+46761355814 (Phone)

IIES ( email )

Stockholm, SE-10691
Sweden
+468163076 (Phone)

Asa Johansson

National Institute of Economic Research - NIER ( email )

Box 3116
Stockholm, 10362
Sweden

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