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Dynamic of Employment and Wages Incentives

Publication Date
  • J41 - Labor Contracts
  • J23 - Labor Demand
  • Economics


This paper studies a dynamic model with efficiency wages and adjustment costs associated with hiring and firing decisions. With linear adjustment costs, the optimal efficiency wage and employment are affected by the real interest rate and adjustment costs. When lumpy costs or convex adjustment costs (symmetric or asymmetric) are taken into account, the interest rate and the adjustment costs do not play any role in determining the equilibrium efficiency wage and level of employment.

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