American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Wage Adjustment in Efficient Long-Term Employment Relationships
American Economic Journal: Macroeconomics
(pp. 271–317)
Abstract
We present a model in which efficient long-term employment relationships are sustained by wage adjustments prompted by productivity shocks and outside job offers. These wage adjustments occur only sporadically, due to the presence of renegotiation costs. The model is amenable to analytical solution, yielding new insights for several labor market phenomena, including (i) key features of empirical distributions of changes in pay among job stayers, (ii) a near-"memorylessness" property in wage dynamics whereby hiring wages have only limited influence on later wages and allocation decisions, and (iii) a crucial role for recruitment and retention bonuses in sustaining efficient employment relationships.Citation
Elsby, Michael W. L., Axel Gottfries, Pawel Krolikowski, and Gary Solon. 2026. "Wage Adjustment in Efficient Long-Term Employment Relationships." American Economic Journal: Macroeconomics 18 (4): 271–317. DOI: 10.1257/mac.20230278Additional Materials
JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E31 Price Level; Inflation; Deflation
- E32 Business Fluctuations; Cycles
- J31 Wage Level and Structure; Wage Differentials
- J64 Unemployment: Models, Duration, Incidence, and Job Search
- M51 Personnel Economics: Firm Employment Decisions; Promotions
- M52 Personnel Economics: Compensation and Compensation Methods and Their Effects