Job security, asymmetric information, and wage rigidity
By Jonathan Thomas, Andy Snell, and Heiko Stueber
Abstract
We consider, under both symmetric and asymmetric information, a labor market with directed search in which firms can commit to wage contracts but are constrained not to pay new hires less than ongoing hires. This constraint can be microfounded as a means of enhancing job security following the approach of Menzio and Moen (2010). Workers are risk averse, so there exists an incentive for firms to smooth wages over time and in the face of shocks to labor productivity. This leads to some downward rigidity in the wages of new hires and magnifies the response of unemployment and vacancies to negative shocks. We further show that the interplay with asymmetric information can substantially enhance wage rigidity and increase the responsiveness of unemployment and vacancies to productivity shocks. In an empirical exercise, we argue that downward — but not upward — real wage rigidity for new hires is apparent in Germany, and we find tentative evidence in favor of the model with asymmetric information.
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