Scand J of Economics 87(2), 411-428, 1985 Insiders and Outsiders in Wage Determination Robert m. solow* Massachusetts Institute of Technology, Cambridge, MA, US A firm starts with a group of insiders or seasoned workers. There is also a large pool of outsiders who are initially less productive, but are transformed into insiders after one period of employment. The firm gains from having a large pool of insiders, some of whom may be laid off in bad years. Insiders gain from keeping their numbers small. If the insiders set the erally, they will choose a path that-in this extreme case--prevents empl outsiders even if future employment prospects are good. If the wage path is set by bargaining, the extra advantage to the firm permits employment of some outsiders y bienterat situations The labor market is still something of a puzzle for macroeconomics. at least since Pigou (1933), it has been clear to mainstream theory that an atomistically competitive labor market could not produce the sort of per- sistent unemployment we see. (I take the proposal that the real-world labor arket is actually in market-clearing equilibrium with respect to some (mis)perceived demand and supply conditions to be a clever jeu d'esprit and not a serious description of modern capitalist economies in prolonged recession )That still leaves a wide variety of possible market institutions d fections"to be analyzed For a long time mainstream macroeconomics more or less ignored the problem of finding an adequate description of the labor market that would fit comfortably with the rest of accepted theory. In the past decade however, there has been a true renaissance in this field with alternative models appearing almost monthly. The result has been a better understand- ing of the implications that follow from the long-term character of the employment-relation, and from the prevalence of explicit and implicit bar gaining. This is surely one of the good effects of the movement to reconcile macroeconomic and microeconomic modes of analysis. Success is not yet Any interesting ideas in this paper are part of a larger project on which I am collaborating with Frank Hahn. The faulty execution is all mine. I thank Lars Calmfors, Henrik Horm Andrew Oswald and the discussants for both helpful and disturbing comments. I have tried to take account of some of their suggestions, but have not had time to follow up all of ther Scand J. of Economics 1985Scand. J. of Economics 87 (2), 41 1--428, 1985 Insiders and Outsiders in Wage Determination Robert M. Solow* Massachusetts Institute of Technology, Cambridge, MA, USA Abstract A firm starts with a group of insiders or seasoned workers. There is also a large pool of outsiders who are initially less productive, but are transformed into insiders after one period of employment. The fm gains from having a large pool of insiders, some of whom may be laid off in bad years. Insiders gain from keeping their numbers small. If the insiders set their wage unilaterally, they will choose a path that-in this extreme case-prevents employment of outsiders even if future employment prospects are good. If the wage path is set by bilateral bargaining, the extra advantage to the firm permits employment of some outsiders in some situations. I. Background The labor market is still something of a puzzle for macroeconomics. At least since Pigou (1933), it has been clear to mainstream theory that an atomistically competitive labor market could not produce the sort of per￾sistent unemployment we see. (I take the proposal that the real-world labor market is actually in market-clearing equilibrium with respect to some (mis)perceived demand and supply conditions to be a clever jeu d'esprit and not a serious description of modern capitalist economies in prolonged recession.) That still leaves a wide variety of possible market institutions and accompanying "imperfections" to be analyzed. For a long time mainstream macroeconomics more or less ignored the problem of finding an adequate description of the labor market that would fit comfortably with the rest of accepted theory. In the past decade, however, there has been a true renaissance in this field, with alternative models appearing almost monthly. The result has been a better understand￾ing of the implications that follow from the long-term character of the employment-relation, and from the prevalence of explicit and implicit bar￾gaining. This is surely one of the good effects of the movement to reconcile macroeconomic and microeconomic modes of analysis. Success is not yet * Any interesting ideas in this paper are part of a larger project on which I am collaborating with Frank Hahn. The faulty execution is all mine. I thank Lars Calmfors, Henrik Horn, Andrew Oswald and the discussants for both helpful and disturbing comments. I have tried to take account of some of their suggestions, but have not had time to follow up all of them. Scand. J. of Economics 1985