Self-enforcing employment contracts and business cycle fluctuations

This paper incorporates risk-sharing employment contracts into an economy in which matching frictions characterize the labour market and in which agents cannot commit. In equilibrium, the terms of ongoing contracts are affected by those being negotiated in the job market because contracts must be self-enforcing. In this context, risk-sharing implies that hours worked and wages are negatively related, while enforcement considerations imply the converse. Overall, the sign of this relationship is ambiguous. Therefore, the existence of such contracts may explain why movements in hours worked appear weakly related to those in real wages in U.S. aggregate data.