Wage Flexibility in Ongoing Employment Relations– An Experiment with a Stochastic Labor Market

Facing a stochastic market wage, which is independent of their own hiring policy, employersoffer contracts specifying fixed wage, revenue share and employment duration.In ongoing employment relations it depends on the treatment whether fixed wages canbe only increased or also decreased. Will the uncertainty of the future market wage andless wage flexibility lead to temporary employment? And, if not, will employers adjustwages to changing market wages and will workers in ongoing employment relations reactto wage decreases via effort choices? Our results partly question empirical claims, e.g.of Bewley (1995), and confirm the tendency to establish ongoing employment relations.Granting more wage flexibility to employers altogether questions rather than enhancesefficiency since it induces opportunistic wage cuts to which employees react with lowerefforts.