Working Paper: NBER ID: w19085
Authors: Kfir Eliaz; Rani Spiegler
Abstract: We incorporate reference-dependent worker behavior into a search-matching model of the labor market, in which firms have all the bargaining power and productivity follows a log-linear AR(1) process. Motivated by Akerlof (1982) and Bewley (1999), we assume that existing workers' output falls stochastically from its normal level when their wage falls below a "reference point", which (following Kőszegi and Rabin (2006)) is equal to their lagged-expected wage. We formulate the model game-theoretically and show that it has a unique subgame perfect equilibrium that exhibits the following properties: existing workers experience downward wage rigidity, as well as destruction of output following negative shocks due to layoffs or loss of morale; newly hired workers earn relatively flexible wages, but not as much as in the benchmark without reference dependence; market tightness is more volatile than under this benchmark. We relate these findings to the debate over the "Shimer puzzle" (Shimer (2005)).
Keywords: No keywords provided
JEL Codes: D03; E24; E32; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| existing workers (J29) | output (C67) |
| wage cuts (J38) | morale (I31) |
| morale (I31) | productivity (O49) |
| new hires (M51) | wages (J31) |
| wage rigidity (J31) | market dynamics (D49) |