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Monopsony and the Lifetime Relation between Wages and Productivity

Yannis M. Ioannides and Christopher A. Pissarides
Journal of Labor Economics
Vol. 3, No. 1, Part 1 (Jan., 1985), pp. 91-100
Stable URL: http://www.jstor.org/stable/2535051
Page Count: 10
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Monopsony and the Lifetime Relation between Wages and Productivity
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Abstract

We consider the relation between wages and productivity by means of a model based on the following assumptions. Workers live for 2 periods, firms live forever, senior workers differ nontrivially from junior, seniority enhances workers' expected second-period earnings, both firms and workers recognize the prospect of promotion and the senior-junior wage differential at the time of hiring, and firms have monopsony power in hiring junior workers. We show that senior wages are equal to the senior marginal product, but junior wages are set below the junior marginal product by an amount that depends on the elasticity of the firm's labor supply.

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