Wage and employment determination in a dynamic insider–outsider model

Abstract

In this paper, I develop a dynamic insider-outsider model in which a union of incumbent workers is called in to choose the wage of its members by taking into account the optimal employment policy of firms that, in turn, are assumed to decide the firing rate of insiders and the number of outsiders to hire. Under the assumption that incumbents are able to observe their own productivity, the one of outsiders and the amount of labour turnover costs paid by firms, I analytically show that the initial stock of insiders may pin down an equilibrium in which the trajectories of incumbents, their own wage and the firing rate are jointly determined and the proposition according to which insiders have an incentive to keep their numbers small holds on a static and a dynamic perspective. Moreover, I numerically show that in this setting insiders adjust their wage in order to retain their positions and such a behaviour leads to asymmetric employment fluctuations and a certain degree of wage stickiness.

The dynamics of working hours and wages under implicit contracts

“…On the productive side—similarly to Guerrazzi (2011, 2020, 2021) and Guerrazzi and Giribone (2021)—we assume that the representative firm is endowed with a quadratic production function so that instantaneous output $$Y(t)$$ is equal to $$\begin{equation} Y(t) =A(t) L(t) -\frac{1}{2}(L(t) ) ^{2} , \end{equation}$$where $$A(t) >0$$ is a technology variable and/or a measure of the economy‐wide output taken as given by the firm and its workers whereas $$L(t)$$ is the labor provision of the workers attached to the firm measured in hours.…”

“…On the productive side-similarly to Guerrazzi (2011Guerrazzi ( , 2020Guerrazzi ( , 2021 and Guerrazzi and Giribone (2021)-we assume that the representative firm is endowed with a quadratic production function so that instantaneous output 𝑌(𝑡) is equal to…”