IZA Seminar - Melvyn G. Coles (18.09.01).pdf

EQUILIBRIUM WAGE/TENURE CONTRACTS1 Ken Burdett and Melvyn G. Coles University of Essex Wivenhoe Park Colchester C04 SQ U.K. June, 2001 1This is a preliminary version. Comments most welcome. Abstract The objective of this study is to analyze and characterize equilibrium in a labor market where …rms post wage contract o¤ers and workers - both employed and unemployed - search for better paid job opportunities. Given the environment faced, it is shown that in equilibrium the contract o¤ered by a …rm to any employee implies the worker’s wage increases with tenure at that …rm. Further, although di¤erent …rms o¤er di¤erent contracts, in equilibrium all contracts can be related to a single wage/tenure contract with di¤erent starting points. The results lead to several predictions about the labor market histories of workers and the nature of labor market equilibria that have not been exploited to date. The objective of this study is to analyze and characterize equilibrium in a labor market where …rms post wage contract o¤ers and workers - both employed and un- employed - search for better paid job opportunities. Given the environment faced, it is shown that in equilibrium the contract o¤ered by a …rm to any employee implies the worker’s wage increases with tenure at that …rm. Further, although di¤erent …rms o¤er di¤erent contracts, in equilibrium all contracts can be related to a single wage/tenure contract with di¤erent starting points. The results lead to several pre- dictions about the labor market histories of workers and the nature of labor market equilibria that have not been exploited to date. During the last ten years or so a literature has deve