Productivity Shocks, Long-Term Contracts, and Earnings Dynamics
American Economic Review · 2022 · Volume 112 · Issue 7
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.
Keywords
Economics of Contract: Theory, Taxation and Subsidies: Externalities, Redistributive Effects, Environmental Taxes and Subsidies, Human Capital, Skills, Occupational Choice, Labor Productivity, Wage Level and Structure, Wage Differentials, Labor Contracts, Job, Occupational, and Intergenerational Mobility, Promotion
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