Preferences for Rigid Versus Individualized Wage Setting in Search Economies with Frictions

37 Pages Posted: 18 May 2004

See all articles by Tito Boeri

Tito Boeri

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Michael C. Burda

Humboldt University of Berlin - Faculty of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: May 2004

Abstract

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 labor markets for intermediate skills. The firing friction is necessary for this effect, and reinforces the impact of both turbulence and other labor market institutions on preferences for rigid wages.

Keywords: wage rigidities, job protection, firing taxes, renegotiation costs, equilibrium unemployment

JEL Classification: J5, J6, D7

Suggested Citation

Boeri, Tito and Burda, Michael C., Preferences for Rigid Versus Individualized Wage Setting in Search Economies with Frictions (May 2004). Available at SSRN: https://ssrn.com/abstract=545665 or http://dx.doi.org/10.2139/ssrn.545665

Tito Boeri (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Michael C. Burda

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
D-10178 Berlin
Germany
+49 30 2093 5638/50 (Phone)
+49 30 2093 5696 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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