Insider‐outsider Effects in Wage Formation: An Empirical Survey*

Abstract

The paper provides a review of empirical work on insider-outsider and duration effects in wage formation. It presents a theoretical model to investigate the relationship between previous employment and the wage rate. The impact of unemployment and long-term unemployment is considered. Empirical results show that the effect of previous employment on the wage rate is generally insignificant. Both short-term and long-term unemployment appear to have a significant negative impact. Micro-studies reveal that both firmspecific and aggregate variables play a role in wage determination.

Hysteresis in Unemployment

“…A recent survey by Lever (1995) summarises the results of empirical investigations into the insider-outsider hypothesis much more thoroughly than we are able to do here. The main conclusion is that there is so far no strong evidence in favour of the insider-outsider hypothesis, but that methodological difficulties suggest a careful interpretation.…”

The Insider-Outsider Theory: A Survey

“…There is also ample empirical evidence of the importance for wage formation of different degrees of "outsiderness". A large number of studies indicate that the long-term unemployed exert considerably less (downward) pressure on real wages than do the short-term unemployed (Layard and Nickel, 1987;Lever, 1991;OECD, 1993, p. 94;Crafts, 1989). This finding fits naturally with the insider-outsider framework.…”

“…70 Though statistical tests of complex issues like these are always hazardous, it is fair to say that the results of most tests are consistent with the hypothesis that both 69 The idea that profits influence wages is an old one, even though it contradicts much traditional theory; see, for instance, Slichter (1950) and Lester (1952). 70 For summaries of parts of the empirical literature in this field, see Holmlund (1990) and Lever (1995).…”

“…By contrast, there is little support for a commonly tested, but quite special insider-outsider model, namely that current wages depend inversely on past employment (which is not a core predictions of the insider-outsider theory); see empirical studies by Nickell and Kong (1988), Nickel and Wadhwani (1990), Lever (1995) and Holmlund (1990) 75 . This theory is often combined with the also highly special hypotheses of pure hysteresis (i.e., that the current unemployment rate is the best estimate of the future unemployment rate).…”