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Wage Dynamics and Insurance (2006)
| Citations: | 4 - 0 self |
BibTeX
@MISC{Macis06wagedynamics,
author = {Mario Macis and Suggestions Of Michael Gibbs and Derek Neal and Canice Prendergast and Luigi Zingales and I Aless and Ro Barbarino and Veronica Guerrieri and Luigi Guiso and Jonathan Thomas},
title = {Wage Dynamics and Insurance},
year = {2006}
}
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Abstract
In this paper, I analyze the influence of labor market conditions on wages by considering an insurance model of the employment relationship. The model allows for limited commitment on both sides of the labor contract, and has three main implications: First, wages can be correlated with both the best and the worst labor market conditions since the start of a worker’s tenure. Second, a firm may be paying different wages to workers with the same outside option, if they were hired in different periods. Such wage differentials, however, should disappear if outside opportunities change substantially. Third, the sensitivity of current wages to upward or downward changes in outside options depends on the previous dynamics of wages. I test these predictions on a unique matched employer-employee panel of male workers from Northern Italy, using the unemployment rate as a proxy for outside options. A consistent and robust set of results supports the two-sided limited commitment labor contract model, while contrasting with alternative theories of wage determination, such as spot market models or continual rebargaining. The evidence suggests that long-term contracting based on insurance considerations plays an important role in employment relationships, once the influence of market forces is taken into account.
Keyphrases
outside option wage dynamic employment relationship labor market condition important role wage differential outside opportunity male worker previous dynamic different period unemployment rate labor contract spot market model robust set wage determination long-term contracting insurance model main implication market force limited commitment insurance consideration northern italy current wage continual rebargaining alternative theory employer-employee panel worker tenure different wage
