Downward Wage Rigidity in a Model of Equal Treatment Contracting

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Following insights by Bewley (1999a), this paper analyses a model with downward rigidities in which firms cannot pay discriminately based on year of entry to the firm, and develops an equilibrium model of wages and unemployment. We solve for the dynamics of wages and unemployment under conditions of downward wage rigidity, where forward-looking firms take into account these constraints. We show that there is a frontloading incentive that leads to a simple solution in the case of certainty. Using productivity data from the postwar US economy, we analyse the ability of the model to match certain stylised labour market facts.
Original languageEnglish
Pages (from-to)841–863
Number of pages23
JournalThe Scandinavian Journal of Economics
Issue number4
Early online date15 Nov 2010
Publication statusPublished - Dec 2010


  • Labour contracts
  • business cycle
  • unemployment;
  • equal treatment
  • downward rigidity
  • cross-contract restrictions


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