Wage and employment determination in a dynamic insider-outsider model

Guerrazzi, Marco (2016): Wage and employment determination in a dynamic insider-outsider model.

Abstract

In this paper, I develop a dynamic insider-outsider model in which a union of incumbent workers is called in to choose the wage of its members by taking into account the optimal employment policy of firms that, in turn, are assumed to decide the firing rate of insiders and the number of outsiders to hire. Under the assumption that incumbents are able to observe their own productivity, the one of outsiders and the amount of labour turnover costs paid by firms, I analytically show that the initial stock of insiders may pin down an equilibrium in which the trajectories of incumbents, their own wage and the firing rate are jointly determined and the proposition according to which insiders have an incentive to keep their numbers small holds on a static and a dynamic perspective. Moreover, I numerically show that in this setting insiders adjust their wage in order to retain their positions and such a behaviour leads to asymmetric employment fluctuations and a certain degree of wage stickiness.

• Item Type: MPRA Paper
• Language: English
• Keywords: Insider-outsider theory; Union modeling; Wage and employment dynamics; Optimal control.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

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