Equilibrium Wage-Tenure Contracts

• Published in: Econometrica Vol. 71; no. 5; pp. 1377 - 1404
• Main Authors: Burdett, Ken, Coles, Melvyn
• Format: Journal Article
• Language: English
• Published: Oxford, UK and Boston, USA Blackwell Publishing Ltd 01.09.2003; Econometric Society; Blackwell
• Subjects: Applications; Biology, psychology, social sciences; Contracts; Econometrics; Economic models; Economics; Employees; Enterprises; Equilibrium; Exact sciences and technology; Insurance, economics, finance; Job hunting; Job search; Labor market; Labor market equilibrium; Labor markets; Labour market; Labour turnover; Market equilibrium; Mathematics; Probability and statistics; Risk aversion; Salary; Sciences and techniques of general use; Search; Statistics; Studies; Tenure; turnover; Unemployment; Wage contracts; wage dispersion; wage-tenure; Wages; Wages & salaries; Workers; Economics; Wage; Matching model; Differential equation; Labour market; Preference theory; Equilibrium; Steady state; Risk aversion; Statistical method; Model matching; Burdett Mortensen framework; Turnover; Distribution function; Environment; Profit; Econometrics; Market equilibrium; Contract
• ISSN: 0012-9682; 1468-0262
• DOI: 10.1111/1468-0262.00453

In this study we consider a labor market matching model where firms post wage-tenure contracts and workers, both employed and unemployed, search for new job opportunities. Given workers are risk averse, we establish there is a unique equilibrium in the environment considered. Although firms in the market make different offers in equilibrium, all post a wage-tenure contract that implies a worker's wage increases smoothly with tenure at the firm. As firms make different offers, there is job turnover, as employed workers move jobs as the opportunity arises. This implies the increase in a worker's wage can be due to job-to-job movements as well as wage-tenure effects. Further, there is a nondegenerate equilibrium distribution of initial wage offers that is differentiable on its support except for a mass point at the lowest initial wage. We also show that relevant characteristics of the equilibrium can be written as explicit functions of preferences and the other market parameters.