A competitive model of worker replacement and wage rigidity

Research output: Contribution to journalArticlepeer-review


We adapt the models of Menzio and Moen (2010) and Snell and Thomas (2010) to consider a labor market in which firms can commit to wage contracts but cannot commit not to replace incumbent workers. Workers are risk averse, so that there exists an incentive for firms to smooth wages. Real wages respond in a highly nonlinear manner to shocks, exhibiting downward rigidity, and magnifying the response of unemployment to negative shocks. We also consider layoffs and show that for a range of shocks labor hoarding occurs while wages are cut. We argue these features are consistent with recent evidence. (JEL E32, J41)
Original languageEnglish
Pages (from-to)419-430
JournalEconomic Inquiry
Issue number1
Early online date25 Jun 2014
Publication statusPublished - Jan 2015


  • JEL E32
  • J41

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