Workers' Reciprocity and the (Ir)relevance of Wage Cyclicality for the Volatility of Job Creation

Research output: Working paperDiscussion paper

Abstract

In the last two decades advances in the theory of labour market fluctuations have emphasised the role of new hires' wage rigidity—rather than wage rigidity of existing workers—to explain the large volatility of unemployment observed in the data. However, recent evidence suggests that wages paid to newly hired workers are substantially pro-cyclical. By considering the effect that wage changes can have on workers' effort, and therefore on output, this paper provides two novel theoretical results. First, it is shown that the anticipation by firms of the effort response of new hires to wage changes can amplify the magnitude of shocks to the extent that, in contrast with the existing literature, the cyclicality of the hiring wage becomes irrelevant for their decision to hire new workers, and hence for the volatility of job creation. Second, it is shown that firms' expectation of existing workers' downward wage rigidity—and the anticipation of their negative reciprocity response to future wage cuts—does matter for the expected value of posting a new vacancy, and under certain conditions it may even reduce firms' incentive to hire.
LanguageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-75
Number of pages76
Volume18
Publication statusPublished - 11 Jul 2018

Fingerprint

Wages
Workers
Cyclicality
Job creation
Wage rigidity
Anticipation
Expected value
Vacancy
Labour market
Unemployment
Incentives
Fluctuations
Hiring

Keywords

  • reciprocity
  • wage cyclicality
  • job creation
  • unemployment volatility

Cite this

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title = "Workers' Reciprocity and the (Ir)relevance of Wage Cyclicality for the Volatility of Job Creation",
abstract = "In the last two decades advances in the theory of labour market fluctuations have emphasised the role of new hires' wage rigidity—rather than wage rigidity of existing workers—to explain the large volatility of unemployment observed in the data. However, recent evidence suggests that wages paid to newly hired workers are substantially pro-cyclical. By considering the effect that wage changes can have on workers' effort, and therefore on output, this paper provides two novel theoretical results. First, it is shown that the anticipation by firms of the effort response of new hires to wage changes can amplify the magnitude of shocks to the extent that, in contrast with the existing literature, the cyclicality of the hiring wage becomes irrelevant for their decision to hire new workers, and hence for the volatility of job creation. Second, it is shown that firms' expectation of existing workers' downward wage rigidity—and the anticipation of their negative reciprocity response to future wage cuts—does matter for the expected value of posting a new vacancy, and under certain conditions it may even reduce firms' incentive to hire.",
keywords = "reciprocity, wage cyclicality, job creation, unemployment volatility",
author = "Marco Fongoni",
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Workers' Reciprocity and the (Ir)relevance of Wage Cyclicality for the Volatility of Job Creation. / Fongoni, Marco.

09. ed. Glasgow : University of Strathclyde, 2018. p. 1-75.

Research output: Working paperDiscussion paper

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AB - In the last two decades advances in the theory of labour market fluctuations have emphasised the role of new hires' wage rigidity—rather than wage rigidity of existing workers—to explain the large volatility of unemployment observed in the data. However, recent evidence suggests that wages paid to newly hired workers are substantially pro-cyclical. By considering the effect that wage changes can have on workers' effort, and therefore on output, this paper provides two novel theoretical results. First, it is shown that the anticipation by firms of the effort response of new hires to wage changes can amplify the magnitude of shocks to the extent that, in contrast with the existing literature, the cyclicality of the hiring wage becomes irrelevant for their decision to hire new workers, and hence for the volatility of job creation. Second, it is shown that firms' expectation of existing workers' downward wage rigidity—and the anticipation of their negative reciprocity response to future wage cuts—does matter for the expected value of posting a new vacancy, and under certain conditions it may even reduce firms' incentive to hire.

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