The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from the National Longitudinal Surveys

A 1991 study by Paul Beaudry and John DiNardo found evidence of internal labor markets that augment incumbent workers' wages when the external labor market is tight (when unemployment is low) and shield their wages when it is slack. Current wages, they found, depend on the tightest labor market conditions observed since a worker was hired, not current labor market tightness or labor market tightness at the time of hiring. This paper replicates and extends that research using data from six cohorts of the National Longitudinal Surveys that together span more than three decades, as well as an estimation framework more robust than that in the original study. The author finds strong support for Beaudry and DiNardo's key prediction. Supplementary regressions confirm other implications of the theory as well. Recently, at least, the effect of implicit contracting on wages has been similar for men and women.