The author uses an equilibrium model of job matchings with a Nash wage equation to derive the response of wages and unemployment to productivity shock. By endogenizing labor's threat point, he shows that wages absorb fully permanent shocks but only partially temporary shocks. Hence, unemployment responds to perceived temporary shocks but not to permanent shocks.

Alternative wage structures under conditions of moral hazard are analyzed from a social-welfare standpoint. It is argued that ex post equity judgements in an uncertainty context should incorporate a preference for "positive correlation" of utilities of different individuals. In the design of compensation schemes, this may give rise to a conflict between ex post equity objectives and the need to provide effort incentives: relative performance clauses in compensation schemes that are useful for providing incentives are undesirable from an ex post equity standpoint.

Many previous studies have found a strong positive effect of job seniority (tenure) on wages. This paper re-examines the evidence using a simple instrumental variables scheme to deal with the fact that tenure is likely to be related to unobserved individual and job characteristics that affect the wage. We use the variation of tenure over a given job match as the principal instrumental variable for tenure. The variation in tenure over the job is uncorrelated by construction with the fixed individual and job match specific components of the error term of the wage equation. Our main finding is that the partial effect of tenure on wages is small, and that general labour market experience and job shopping account for most wage growth over a career. The strong cross section relationship between tenure and wages is due primarily to heterogeneity bias.

This paper demonstrates, using the Reflection Principle, the existence and uniqueness of the solution to the classic Solow equation under continuous time uncertainty for the class of strictly concave production functions which are continuously differentiable on the nonnegative real numbers. This class contains all CES functions with elasticity of substitution less than unity. A steady state distribution also exists for this class of production functions which have a bounded slope at the origin. A condition on the drift-variance ratio of the stochastic differential equation alone, independent of technology and the savings ratio, is found to be necessary for the existence of a steady state.