Implicit Contracts, Wage Cyclicality and Import Competition

Using employer-employee panel data we study implicit wage contracting in the Finnish labour markets by employing variations of the standard wage curve. We …nd strong evidence in support for the negative wage-current unemployment elasticity, i.e. support for the standard wage curve. We also …nd both economically and statistically signi…cant negative wage-start-of-tenure-unemployment elasticity. The wage-current unemployment rate elasticity is roughly -0.02, while wage-start-of-tenure elasticity is about -0.015. The evidence on weakening of the wage-current unemployment elasticity after controlling for the unemployment rate at start-of-tenure is weak, yet the minimum unemployment is more important predictor of current wages than both the current and the starting unemployment. These results suggests that implicit contracting where the contract is not binding on the worker is a feature which is consistent with our data. As for the importance of import competition, our results point to a weakening impact on both of the aforementioned wage-unemployment elasticities.