Scandinavian Working Papers in Economics

Working Paper Series,
Trade Union Institute for Economic Research

No 160: Taxes, Risk Aversion and Unemployment Insurance as Causes of Wage Rigidity

Per Lundborg
Additional contact information
Per Lundborg: Trade Union Institute for Economic Research, Postal: FIEF, Wallingatan 38, SE-111 24 Stockholm, Sweden

Abstract: Recent empirical evidence has shown that nominal wages are more rigid among blue-collar (low income) workers than among white-collar (high income) workers. We show theoretically that employees in crisis-ridden firms will reject wage cut proposals that save jobs if risk aversion is great, replacement rates high and marginal taxes low. These factors for can explain why wage rigidity is less intense among high-income earners than among low-income earners. We argue, that with economic growth nominal wages should become more flexible, since marginal taxes increase, the marginal utility of income drops, normally, replacement rates fall.

Keywords: Wage rigidity; Marginal taxes; Risk aversion; Unemployment

JEL-codes: H20; J30; J65

16 pages, May 25, 2000

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