Equilibrium wage-tenure contracts

Ken Burdett, Melvyn Coles

Research output: Contribution to journalArticlepeer-review

Abstract

In this study we consider a labor market matching model where firms post wage-tenure 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.

Original languageEnglish (US)
Pages (from-to)1377-1404
Number of pages28
JournalEconometrica
Volume71
Issue number5
DOIs
StatePublished - 2003

Keywords

  • Contracts
  • Search
  • Turnover
  • Wage dispersion
  • Wage-tenure

ASJC Scopus subject areas

  • Economics and Econometrics

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