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- Title
A Theory of Wage Dynamics.
- Authors
Harris, Milton; Holmstrom, Bengt
- Abstract
A dynamic, equilibrium model of long term (implicit) labour contracts under incomplete but symmetric information is developed. Workers are assumed to be risk averse and of unknown ability or productivity. Risk neutral firms learn, as do workers, about each worker's productivity by observing the worker's output over time. It is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker's market value increases above his current wage. In addition to characterizing the equilibrium wage contract, we also derive some of its implications for the behaviour of aggregate wages across various groups of workers. These implications explain some findings in the recent empirical literature on age-earnings profiles. In particular our model can explain why earnings may be positively related to experience even after controlling for productivity, as some empirical studies have indicated.
- Subjects
ECONOMIC equilibrium; RISK; WAGES &; labor productivity; MODELS &; modelmaking; WAGES; MARKET value; FAIR value
- Publication
Review of Economic Studies, 1982, Vol 49, Issue 3, p315
- ISSN
0034-6527
- Publication type
Article
- DOI
10.2307/2297359