Job Destruction and Wage Dynamics

Abstract

Models of job creation and destruction emphasize the endogeneity of the decision to start up or kill off a job. Faced with random and largely idiosyncratic shocks to productivity, firms adopt a reservation strategy for keeping a job in existence. This reservation productivity depends upon the wage determination rule that is used by the parties. Comparatively little is known about the interaction of wage policy and job destruction. This paper provides an empirical analysis of job destruction and wages in Danish firms. The basic empirical facts about job creation and destruction are described in section 2, and their connection to wages is explored and described in section 3. In keeping with the literature this analysis is simply descriptive. Structural analysis of a simple model of job description is analyzed in section 4, and the conditions needed to estimate the distribution of unobserved productivity are noted. An empirical example using matched worker-plant information from the Danish IDA data for 1981-91 is presented.