Insiders and outsiders in wage determination 415 unemployed workers lack firm-specific skills possessed by members of a labor pool. They are therefore less productive than experienced workers. If he firm we are studying were to hire e21 inexperienced workers in period along with el skilled workers, one might quite generally write the revenue generated as s F(el, ez1), where F would have to be given a special property to represent the lower productivity of inexperienced workers For example, F(, y)>FG, x) whenever x>y )We will settle for a simple special case of this assumption, namely that the firm's revenue in the first period will be si f(e11)+si f(ez1) where is a fixed constant between zero and one. In period 2, the firms revenue from employing e1 experi enced and e22 inexperienced workers is si f(e12)+S2 f(e22) We are concerned with the wage rate of skilled workers in periods 1 and called Wn and W2, respectively. Unskilled workers have a reservation wage of wz, which we take to be the same in both periods. The reservation wage is determined by some mixture of unemployment compensation leisure, wages in casual employment, the availability of casual employ- ment, and other such factors Labor is the only variable factor of production. Thus the firm s objective is to achieve a large value of slf(en)+q(e2)]-uneln-u2e2+R{s2[f(en)+(e2)]-u2e12-u2e2 wherer is a discount factor For reasons touched on earlier the firm is assumed not to make payments to laid-off members of its labor pool If the firm operated in a series of spot markets for the two kinds of labor facing parametric wages, it would determine eu, e2l, e,2, and en by four independent marginal productivity conditions. (The discount factor would not matter at all, because there would be no intertemporal implications of any of the firms actions, so no reason for it to compare one period with another But the labor market of the model is not like that, and so the firm chooses its behavior differently. The story extends over two periods, As mentioned the firm starts with a pool of experienced workers, m in number. These workers are organized in a formal or informal union. For a first pass, we assume that the union is able simply to quote wages Wl and w12 for experienced labor in the two periods, while the firm is able to choose levels of employment unilaterally. Thus the firm also decides how many inexperienced workers e2 to hire in he first period, if any. They are freely available at the reservation wage w? (The parallel quantity e22 in the second period is unimportant, because the second period is--artificially-the last period, and so we forget about it. Our key assumption is that inexperienced workers hired in period 1 are z This is a simplification that could easily be dispensed with Scand J. of Economics 1985Insiders and outsiders in wage determination 415 unemployed workers lack firm-specific skills possessed by members of a labor pool. They are therefore less productive than experienced workers. If the firm we are studying were to hire ezl inexperienced workers in period 1 along with ell skilled workers, one might quite generally write the revenue generated as slF(ell,e21), where F would have to be given a special property to represent the lower productivity of inexperienced workers. (For example, F(x,y)>F(y,x) whenever x>y.) We will settle for a simple special case of this assumption, namely that the firm's revenue in the first period will be sl f(ell)+sl@f(e21) where @ is a fixed constant between zero and one. In period 2, the firm's revenue from employing el, experi￾enced and ez2 inexperienced workers is sl f(e12)+sz @f(e2z). We are concerned with the wage rate of skilled workers in periods 1 and 2, called wl and wlz, respectively. Unskilled workers have a reservation wage of w,, which we take to be the same in both peri~ds.~ The reservation wage is determined by some mixture of unemployment compensation, leisure, wages in casual employment, the availability of casual employ￾ment, and other such factors. Labor is the only variable factor of production. Thus the firm's objective is to achieve a large value of where R is a discount factor. For reasons touched on earlier, the firm is assumed not to make payments to laid-off members of its labor pool. If the firm operated in a series of spot markets for the two kinds of labor, facing parametric wages, it would determine ell, e,,, el,, and e,, by four independent marginal productivity conditions. (The discount factor would not matter at all, because there would be no intertemporal implications of any of the firm's actions, so no reason for it to compare one period with another.) But the labor market of the model is not like that, and so the firm chooses its behavior differently. The story extends over two periods. As mentioned, the firm starts with a pool of experienced workers, m in number. These workers are organized in a formal or informal union. For a first pass, we assume that the union is able simply to quote wages wll and w12 for experienced labor in the two periods, while the firm is able to choose levels of employment unilaterally. Thus the firm also decides how many inexperienced workers ezl to hire in the first period, if any. They are freely available at the reservation wage w,. (The parallel quantity ez2 in the second period is unimportant, because the second period is-artificially-the last period, and so we forget about it.) Our key assumption is that inexperienced workers hired in period 1 are This is a simplification that could easily be dispensed with. Scand. J. of Economics 1985