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Employment Duration and Resistance to Wage Reductions: Experimental Evidence

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  • Michael Burda

    ()
    (Department Faculty of Economics, Humboldt University, Berlin, Germany)

  • Werner Güth

    ()
    (Max Planck Institute for Research into Economic Systems, Jena, Germany)

  • Georg Kirchsteiger

    ()
    (ECARES-Université Libre de Bruxelles)

  • Harald Uhlig

    ()
    (Faculty of Economics, Humboldt University, Berlin, Germany)

Abstract

One of the long-standing questions in economics is whether or not wages will fall sufficiently in recessions so as to avoid increases in unemployment. Put differently, if the competitive market wage declines, will employers simply force their employees to accept lower wages as well? As an alternative to reviewing statistical data, we have performed an experiment with a lower competitive wage in the second phase of an employment relationship that is known and can thus be (rationally) anticipated by both parties. The experiment casts two subjects in the highly stylized roles of employer and employee. For the hypothesis that employers will not lower wages correspondingly and that employees will resist such wage cuts we find at most mild evidence. Instead, the experimental results can be more fruitfully interpreted in terms of an “ultimatum game”, in which surplus between employers and employees is shared. In this view, wages and their lack of decline are simply the mechanical tool for accomplishing this split.

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Bibliographic Info

Article provided by Institute of SocioEconomics in its journal Homo Oeconomicus.

Volume (Year): 22 (2005)
Issue (Month): ()
Pages: 169-189

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Handle: RePEc:hom:homoec:v:22:y:2005:p:169-189

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  1. Fehr, Ernst & Kirchsteiger, Georg & Riedl, Arno, 1996. "Involuntary Unemployment and Non-compensating Wage Differentials in an Experimental Labour Market," Economic Journal, Royal Economic Society, vol. 106(434), pages 106-21, January.
  2. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  3. Boldrin, Michael & Horvath, Michael, 1995. "Labor Contracts and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 972-1004, October.
  4. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-89, August.
  5. Solon, Gary & Barsky, Robert & Parker, Jonathan A, 1994. "Measuring the Cyclicality of Real Wages: How Important Is Composition Bias?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 1-25, February.
  6. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
  7. Oswald, Andrew J, 1985. " The Economic Theory of Trade Unions: An Introductory Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 160-93.
  8. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  9. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  10. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-75, September.
  11. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 437-59, May.
  12. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
  13. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, vol. 85(2), pages 250-54, May.
  14. Guth, Werner, 1995. "On ultimatum bargaining experiments -- A personal review," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 329-344, August.
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Cited by:
  1. Truman F. Bewley, 2002. "Fairness, Reciprocity, and Wage Rigidity," Cowles Foundation Discussion Papers 1383, Cowles Foundation for Research in Economics, Yale University.
  2. Bewley, Truman, 2004. "Fairness, Reciprocity, and Wage Rigidity," IZA Discussion Papers 1137, Institute for the Study of Labor (IZA).
  3. Smith, Jennifer C., 2002. "Pay Cuts And Morale : A Test Of Downward Nominal Rigidity," The Warwick Economics Research Paper Series (TWERPS) 649, University of Warwick, Department of Economics.
  4. Christian Calmès, 2005. "Self-Enforcing Labour Contracts and the Dynamics Puzzle," Working Papers 05-1, Bank of Canada.

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