Equilibrium Wage-Tenure Contracts

Abstract

In this study we consider a labor market matching model where firms post wagetenure contracts and workers, both employed and unemployed, search for new job opportunities. Given workers are risk averse, we establish there is a unique equilibrium in the environment considered. Although firms in the market make different offers in equilibrium, all post a wage-tenure contract that implies a worker's wage increases smoothly with tenure at the firm. As firms make different offers, there is job turnover, as employed workers move jobs as the opportunity arises. This implies the increase in a worker's wage can be due to job-to-job movements as well as wage-tenure effects. Further, there is a nondegenerate equilibrium distribution of initial wage offers that is differentiable on its support except for a mass point at the lowest initial wage. We also show that relevant characteristics of the equilibrium can be written as explicit functions of preferences and the other market parameters.

Wage Inequality and Job Stability

“…I depart from existing frameworks by incorporating heterogeneous layoff rates into an otherwise standard Burdett and Mortensen [1998] (BM) model. Existing models such as Burdett and Coles [2003] and Shi [2009] are consistent with the fact that lowwage jobs have higher turnover. 4 However, these models assume identical layoff rates across including Engbom and Moser [2016], who argue that minimum wages mitigated a sizable fraction of Brazil's wage inequality.…”

Training, search and wage dispersion

“…27 One way is to allow …rms to backload wages, as in Burdett and Coles (2003) and Stevens (2004). In this case, a contract would consist of a wage-tenure pro…le along with training intensity.…”

“…The worker-…rm joint bene…t from training, B(v), is increasing in v. 9 At a higher v, both the …rm and the worker are more willing to pay for training. For the …rm, o¤ering the worker a higher v keeps the worker for a longer time and extracts more from her, which justi…es its investment in training.…”

“…3 Quercioli (2005) considers …rms'decisions on speci…c training in a BM framework. 4 I also abstract from wage-tenure contracts studied in Burdett and Coles (2003) and Stevens (2004). intensities.…”

“…u denote the highest value and the lowest value o¤ered in a market where no …rm 9 See Appendix A for the proof.…”