Seniority Rules and the Persistence of Unemployment.

The authors formulate a stochastic infinite-horizon insider-outsider model that is solved explicitly and used to investigate the consequences of alternative 'seniority' rules for wage and employment determination. The model is simple enough to allow analysis of several different institutional setups. Persistence (but not hysteresis) arises when employment affects the layoff and hiring priority of workers and their relative influence on union decisions. Persistence can arise both when layoffs are random and when there is a strict layoff order. Expected employment depends not only on employment in the previous period but on a longer history of shocks. Copyright 1994 by Royal Economic Society.