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Labor Contracts, Equal Treatment, and Wage-Unemployment Dynamics
Andy Snell, Jonathan P. Thomas
American Economic Journal: Macroeconomics. Jul 2010, Vol. 2, No. 3: Pages 98-127

Labor Contracts, Equal Treatment, and Wage-Unemployment Dynamics

Andy Snell, 1

1School of Economics, University of Edinburgh, 31 Buccleuch Place, Edinburgh EH8 9JT, UK.

Jonathan P. Thomas2

2School of Economics, University of Edinburgh, 31 Buccleuch Place, Edinburgh EH8 9JT, UK.

Abstract

This paper analyses a model in which firms cannot pay discriminate based on year of entry. It is assumed that workers can costlessly quit at any time, while firms are committed to contracts. We solve for the dynamics of wages and unemployment, and show that real wages display a degree of downward rigidity and do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match the actual unemployment series. We also show that equal treatment follows from the assumption of at-will employment contracting in our model. (JEL E24, E32, J31, J41)