The Pass-through of Productivity Shocks to Wages and the Cyclical Competition for Workers

Résumé

Using French matched employer-employee data, I document that after positive firm-level productivity shocks, the wages of stayers rise and job-to-job transitions fall. However, after positive sectoral productivity shocks, wages rise significantly more and job-to-job transitions rise. To explain these differences, I build a model with dynamic wage contracts subject to two-sided limited commitment and imperfect information and in which sectoral productivity shocks generate cyclical competition for workers. After a positive firm-level shock, a firm increases its wages to reduce the quit rate of its workers. This increase is limited because workers are risk-averse and value insurance against shocks and because there is no increase in the cyclical competition from other firms. In contrast, after positive sectoral shocks, the cyclical competition for workers heats up and workers become more likely to switch jobs. In response, all firms increase their wages more aggressively to retain them. I find that firing costs play a new role when contracts are endogenous: by enhancing the commitment power of firms, they allow workers to receive more insurance against negative shocks.