Discussion Paper No. 506 - Forschungsinstitut zur Zukunft der Arbeit

Discussion Paper No. 506 - Forschungsinstitut zur Zukunft der Arbeit

DISCUSSION PAPER SERIES
IZA DP No. 506
Can Insider Power Affect Employment?
Pilar Díaz-Vázquez
Dennis Snower
May 2002
Forschungsinstitut
zur Zukunft der Arbeit
Institute for the Study
of Labor
Can Insider Power Affect Employment?
Pilar Díaz-Vázquez
Universidad de Santiago de Compostela
Dennis Snower
Department of Economics, Birkbeck College,
CEPR and IZA Bonn
Discussion Paper No. 506
May 2002
IZA
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D-53072 Bonn
Germany
Tel.: +49-228-3894-0
Fax: +49-228-3894-210
Email: [email protected]
This Discussion Paper is issued within the framework of IZA’s research area the Welfare
State and Labor Markets. Any opinions expressed here are those of the author(s) and not
those of the institute. Research disseminated by IZA may include views on policy, but the
institute itself takes no institutional policy positions.
The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research
center and a place of communication between science, politics and business. IZA is an
independent, nonprofit limited liability company (Gesellschaft mit beschränkter Haftung)
supported by the Deutsche Post AG. The center is associated with the University of Bonn
and offers a stimulating research environment through its research networks, research
support, and visitors and doctoral programs. IZA engages in (i) original and internationally
competitive research in all fields of labor economics, (ii) development of policy concepts, and
(iii) dissemination of research results and concepts to the interested public. The current
research program deals with (1) mobility and flexibility of labor, (2) internationalization of
labor markets, (3) the welfare state and labor markets, (4) labor markets in transition
countries, (5) the future of labor, (6) evaluation of labor market policies and projects and (7)
general labor economics.
IZA Discussion Papers often represent preliminary work and are circulated to encourage
discussion. Citation of such a paper should account for its provisional character. A revised
version may be available on the IZA website (www.iza.org) or directly from the author.
IZA Discussion Paper No. 506
May 2002
ABSTRACT
Can Insider Power Affect Employment?
Do firms reduce employment when their insiders (established, incumbent employees) claim
higher wages? The conventional answer in the theoretical literature is that insider power has
no influence on employment, provided that the newly hired employees (entrants) receive their
reservation wages. The reason given is that an increase in insider wages gives rise to a
counterveiling fall in reservation wages, leaving the present value of wage costs unchanged.
Our analysis contradicts this conventional answer. We show that, in the context of a
stochastic model of the labor market, an increase in insider wages promotes firming in
recessions, while leaving hiring in booms unchanged. Thereby insider power reduces
average employment.
JEL Classification:
Keywords:
E24, J23, J31, J42, J64
insider power, employment, labor demand, wage differentials
Dennis Snower
Department of Economics
Birkbeck College
University of London
7 Gresse Street
London W1P 1PA
Tel.: +44 (207) 631 6408
Email: [email protected]
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46
IZA Discussion Papers
No.
Author(s)
Title
Area
490
W. F. Richter
Social Security and Taxation of Labour Subject
to Subsidiarity and Freedom of Movement
2
05/02
491
R. Rotte
C. M. Schmidt
On the Production of Victory: Empirical Determinants of Battlefield Success in Modern War
5
05/02
492
R. Lalive
J. Zweimüller
Benefit Entitlement and Unemployment
Duration: The Role of Policy Endogeneity
6
05/02
493
R. M. Leontaridi
M. E. Ward
Work-Related Stress, Quitting Intentions and
Absenteeism
5
05/02
494
J. Wagner
R. Sternberg
The Role of the Regional Milieu for the Decision
to Start a New Firm: Empirical Evidence for
Germany
1
05/02
495
J. T. Addison
L. Bellmann
C. Schnabel
J. Wagner
German Works Councils Old and New:
Incidence, Coverage and Determinants
3
05/02
496
M. P. Keane
E. S. Prasad
Changes in the Structure of Earnings During the
Polish Transition
4
05/02
497
D. Gatti
European Integration and Employment:
A New Role for Active Fiscal Policies?
2
05/02
498
P. Frijters
J. P. Haisken-DeNew
M. A. Shields
Individual Rationality and Learning: Welfare
Expectations in East Germany PostReunification
6
05/02
499
G. A. Pfann
H. van Kranenburg
Tax Policy, Location Choices, and Market
Structure
6
05/02
500
D. A. Jaeger
Estimating the Returns to Education Using the
Newest Current Population Survey Education
Questions
6
05/02
501
C. Dustmann
N. Rajah
A. van Soest
Class Size, Education, and Wages
5
05/02
502
B. R. Chiswick
Y. L. Lee
P. W. Miller
Immigrants’ Language Skills: The Australian
Experience in a Longitudinal Survey
1
05/02
503
R. Winter-Ebmer
A. Wirz
Public Funding and Enrolment into Higher
Education in Europe
3
05/02
504
L. Cappellari
S. P. Jenkins
Modelling Low Income Transitions
4
05/02
505
T. K. Bauer
Migration, Sozialstaat und Zuwanderungspolitik
1
05/02
506
P. Díaz-Vázquez
D. Snower
Can Insider Power Affect Employment?
3
05/02
An updated list of IZA Discussion Papers is available on the center‘s homepage www.iza.org.
Date