Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 1998:10: Insider Bargaining Power, Starting Wages, and Involuntary Unemployment

Nils Gottfries () and Tomas Sjöström
Additional contact information
Nils Gottfries: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Tomas Sjöström: Department of Economics, Postal: Pennsylvania State University, 610 Kern Building, University Park, PA 16802-3306, USA

Abstract: Recent analyses of wage bargaining has emphasized the distinction between insiders and outsiders, yet one typically assumes that insiders and recently hired outsiders are paid the same wage. We consider a model where the starting wage for outsiders may be lower than the insider wage, but incentive constraints associated with turnover affect the form of the contract. We examine under what conditions the starting wage is linked to the insider wage so that increased bargaining power of insiders raises the starting wage and reduces hiring of outsiders.

Keywords: starting wage; bargain; seniority; unemployment

JEL-codes: J23; J31; J33

26 pages, April 16, 1998

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