Spot market wages, implicit contracts and technological change: skill-level evidence from Finland

Abstract

This article investigates the relevance of the theories of implicit contracts and spot market model to the skill-level wages in Finland. We use linked worker-firm panel data over the period from 1991 to 2004, which included major institutional and technological changes. We find similar patterns in the wage flexibility of primary and highly educated workers: their wages increased with the decreasing spot market unemployment rate after the EU membership still exhibiting some weak backward linkages. The wages of the secondary-educated did not follow the decreasing spot market unemployment, but instead some signs of the full commitment risk sharing were found.

Keywords:

• implicit contracts
• spot market
• unemployment
• technological change

JEL Classification:

• J30

Acknowledgements

The financial support from the Yrjö Jahnsson Foundation is gratefully acknowledged (grant 5764 and 5957). We also thank an anonymous referee, Petri Böckerman and the seminar participants in Jyväskylä for their valuable comments.

Notes

¹ Acemoglu (1999) explains the polarization by search frictions in the labour market. If the supply of skilled labour increases, firms start to eliminate jobs in the middle of the distribution, replacing these jobs with vacancies for both highly skilled and unskilled workers.

² The wage limits for females are 1400 (1750) euros per month with primary and secondary level (higher level) of education and for males are 1600 (2000) euros per month with primary and secondary level (higher level) of education. These limits are based on the information from Statistics Finland on mean wages at the lowest percentile for the employees’ earnings distribution at that particular education level.

³ The recession occurred because of badly managed financial deregulation of the 1980s, the collapse of Soviet Union that led to a 70% drop in trade with Russia, an overall sharp drop in aggregate demand and a slowdown in the economies of Western Europe.

⁴ To avoid a problem of collinearity with the different unemployment rates, we estimated the wage equation with all possible combinations as in Table 3. The results were basically qualitative and quantitative representative. Therefore, the results of the model that augment all three unemployment measures are presented. The complete results are available from the authors upon request.