A Theory of Wage Dynamics

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ID: 302171
1982
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Abstract
A dynamic, equilibrium model of long term (implicit) labour contracts under incomplete but symmetric information is developed. Workers are assumed to be risk averse and of unknown ability or productivity. Risk neutral firms learn, as do workers, about each worker's productivity by observing the worker's output over time. It is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker's market value increases above his current wage. In addition to characterizing the equilibrium wage contract, we also derive some of its implications for the behaviour of aggregate wages across various groups of workers. These implications explain some findings in the recent empirical literature on age-earnings profiles. In particular our model can explain why earnings may be positively related to experience even after controlling for productivity, as some empirical studies have indicated.
Reference Key
openalex_W2091391576 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Milton Harris, Bengt Holmström
Journal The Review of Economic Studies
Year 1982
DOI
10.2307/2297359
URL
https://doi.org/10.2307/2297359
Keywords Keywords not found

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