1Why Do Labour Contracts Offer Guaranteed Annual Wage Increments?

Abstract: Academic contracts in the UK are characterised by wages that rise with annual increments and guaranteed future employment. In a model based on the arrival of outside offers, it is shown how such seniority wages can arise in both competitive labour markets and when the employer enjoys some monopsony power. The model is then reinterpreted to introduce risk about future productivity. In this framework, it is shown that seniority wages can co-exist with the rational offer of a tenure contract by the firm. Key-words: long-term contracts, tenure, wage profil