Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/2787 
Year of Publication: 
2002
Series/Report no.: 
IZA Discussion Papers No. 506
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
Do firms reduce employment when their insiders (established, incumbent employees) claim higher wages? The conventional answer in the theoretical literature is that insider power has no influence on employment, provided that the newly hired employees (entrants) receive their reservation wages. The reason given is that an increase in insider wages gives rise to a counterveiling fall in reservation wages, leaving the present value of wage costs unchanged. Our analysis contradicts this conventional answer. We show that, in the context of a stochastic model of the labor market, an increase in insider wages promotes firming in recessions, while leaving hiring in booms unchanged. Thereby insider power reduces average employment.
Subjects: 
employment
labor demand
wage differentials
insider power
JEL: 
J42
J64
E24
J23
J31
Document Type: 
Working Paper

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