Productivity Shocks, Long-Term Contracts, and Earnings Dynamics
American Economic Review
vol. 112,
no. 7, July 2022
(pp. 2139-77)
Abstract
This paper examines how employer- and worker-specific productivity shocks transmit to earnings and employment. We develop an equilibrium search model and characterize the optimal contract offered by firms. Risk-neutral firms provide partial insurance against shocks to risk-averse workers and offer contingent contracts, where payments are backloaded in good times and frontloaded in bad times. The model is estimated on matched employer-employee data from Sweden. Firms absorb persistent worker and firm shocks, with respective passthrough values of 26 and 10 percent. We evaluate the effects of redistributive policies and find that 30 percent of government insurance is undone by crowding out firm insurance.Citation
Balke, Neele, and Thibaut Lamadon. 2022. "Productivity Shocks, Long-Term Contracts, and Earnings Dynamics." American Economic Review, 112 (7): 2139-77. DOI: 10.1257/aer.20161622Additional Materials
JEL Classification
- D86 Economics of Contract: Theory
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity
- J31 Wage Level and Structure; Wage Differentials
- J41 Labor Contracts
- J62 Job, Occupational, and Intergenerational Mobility; Promotion