Equal treatment, worker replacement and wage rigidity

Research output: Contribution to conferencePaper


We adapt the model of Menzio and Moen (2010) to consider a labour market
with directed search in which …rms can commit to wage contracts but cannot
commit not to replace incumbent workers. Workers are risk averse, so that
there exists an incentive for …rms to smooth wages over time and in the face of
shocks to labour productivity. To avoid worker replacement (which saves on
the ex ante wage bill), they may choose a wage for new hires that is equally
unresponsive to shocks. This leads to a large degree of downward rigidity
in the wages of new hires, and magni…es the response of unemployment and
vacancies to negative shocks. Our version of the Menzio-Moen model allows
for the analysis of positive probability shocks in a tractable way. Moreover, we
argue that the model provides a useful framework for analysing other sources
of wage rigidity; for example adding asymmetric information can substantially
enhance the rigidity and the responsiveness of unemployment and vacancies
to productivity shocks.
Original languageEnglish
Number of pages17
Publication statusPublished - 19 Oct 2011
EventBank of Spain - Madrid, United Kingdom
Duration: 19 Oct 201119 Nov 2011


ConferenceBank of Spain
Country/TerritoryUnited Kingdom


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


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