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Calmfors, Lars
Johansson, Åsa
Year of Publication: 
Series/Report no.: 
CESifo Working Paper No. 514
We show in a union-bargaining model that a decrease in the unemployment benefit level increases not only equilibrium employment, but also nominal wage flexibility, and thus reduces employment variations in the case of nominal shocks. Long-term wage contracts lead to highter expected real wages and hence higher expected unemployment than short-term contracts. Therefore lower benefits reduce the expected utility gross of contract costs of a union member more with long-term than with short-term contracts and thus create an incentive for shorter contracts. Incentives for employers work in the same direction. Lower taxes associated with lower benefits also tend to make short-term contracts more attractive.
Nominal wage flexibility
contracts length
macroeconomic fluctuations
unemployment benefits
Document Type: 
Working Paper

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