The intent of this research project is to examine the relationship between wage contracts in individual firms and the equilibrium in the labour market. We will analyse the relationship between wage contracts and unemployment, human capital investment, innovation and welfare.
The project will to a large extent be undertaken by the head of the project Espen R. Moen in collaboration with Åsa Rosen at the University of Stockholm.
In the 1980s, the relationship between wage contracts and macroeconomic performance, in particular the unemployment rate, was much in focus. Prominent examples are the work on profit sharing (Weitzman 1985) and efficiency wage models (Shapiro and Stiglitz 1984). Our theoretical analysis deviates from this literature in two directions:
First, our analysis employs more sophisticated models of contracts. In the early literature, wage contracts were modelled in a rather parsimoniously way. Since then theories of contracts have developed considerably. New developments include rent extraction models (Laffont and Tirole 1993), multi-tasking (Homstrøm and Milgrom 1991), and theories of promotions and deferred compensation (here the seminal contribution came early, see Lazear and Rosen 1981). Based on these recent theoretical models of contract theory, we intend to study the relationship between wage contracts and macroeconomic performance.
Second, our analysis includes search frictions in the labour market. Search and matching models of the labour market have become increasingly popular over the last decade, in particular the Diamon-Mortensen-Pissarides equilibrium search model (see Diamond 1982, Mortensen 1986, and Pissarides 2000 for an overview of the literature). We will apply the competitive search equilibrium concept, developed in Moen (1997).
A core element in our analysis is what we refer to as equilibrium feedback mechanisms. Equilibrium feedback exists if a given agent’s outcome depends on the behaviour of agents on the same side of the market, because their behaviour influences the actions of agents on the other side of the market.
The project will be segmented into four parts. We will focus on developing theoretical models in the following four areas:
- The effects of performance pay on unemployment and welfare
- Human capital formation in labour markets with frictions
- Labour market determinants of turnover and entrepreneurship
- Behavioural job-search: the role of contracts and institutions
We believe that the project may shed light on issues of great practical interest, particularly for a country like Norway.
For several reasons, the Norwegian economy will have to restructure in the future, primarily because the petroleum sector is diminishing and demographics are changing (the population is aging). In order to obtain an efficient allocation of workers across sectors and firms it is imperative that the market for employed workers function well.
Furthermore, as the petroleum sector diminishes it is vital that the entrepreneurial potential in the economy is utilized fully and not locked into existing firms. A deeper understanding of the processes that jointly determine wage contracts, turnover decisions, the supply of entrepreneurs and the unemployment rate will therefore be in high demand.