DP4444 Preferences for Rigid Versus Individualized Wage Setting
|Author(s):||Tito Boeri, Michael C Burda|
|Publication Date:||June 2004|
|Keyword(s):||equilibrium unemployment, firing taxes, job protection, renegotiation costs, wage rigidities|
|JEL(s):||D70, J50, J60|
|Programme Areas:||Labour Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4444|
Firing frictions and renegotiation costs affect worker and firm preferences for rigid wages versus individualized Nash bargaining in a standard model of equilibrium unemployment, in which workers vary by observable skill. Rigid wages permit savings on renegotiation costs and prevent workers from exploiting the firing friction. For standard calibrations, the model can account for political support for wage rigidity by both workers and firms, especially in labour markets for intermediate skills. The firing friction is necessary for this effect, and reinforces the impact of both turbulence and other labour market institutions on preferences for rigid wages.