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Title:Employment fluctuations with downward wage rigidity: the role of moral hazard PDF Logo
Authors:Costain, James S.
Jansen, Marcel
Issue Date:2009
Series/Report no.:IZA Discussion Papers 4344
Abstract:This paper studies the cyclical dynamics of Mortensen and Pissarides' (1994) model of job creation and destruction when workers' effort is not perfectly observable, as in Shapiro and Stiglitz (1984). An occasionally-binding no-shirking constraint truncates the real wage distribution from below, making firms' share of surplus weakly procyclical, and may thus amplify fluctuations in hiring. It may also cause a burst of inefficient firing at the onset of a recession, separating matches that no longer have sufficient surplus for incentive compatibility. On the other hand, since marginal workers in booms know firms cannot commit to keep them in recessions, they place little value on their jobs and are expensive to motivate. For a realistic calibration, this last effect is by far the strongest; even a moderate degree of moral hazard can eliminate all fluctuation in the separation rate. This casts doubt on Ramey and Watson's (1997) contractual fragility mechanism, and means worker moral hazard only makes the unemployment volatility puzzle worse. However, moral hazard has potential to explain other labor market facts, because it is consistent with small but clearly countercyclical fluctuations in separation rates, and a robust Beveridge curve.
Subjects:Job matching
shirking
efficiency wages
endogenous separation
contractual fragility
JEL:C78
E24
E32
J64
Persistent Identifier of the first edition:urn:nbn:de:101:1-20090909598
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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