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Employment Duration and Resistance to Wage Reductions: Experimental Evidence

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  • Burda, M.
  • Güth, W.
  • Kirchsteiger, G.
  • Uhlig, H.F.H.V.S.

    (Tilburg University, Center for Economic Research)

Abstract

One of the long-standing puzzles in economics is why wages do not fall sufficiently in recessions so as to avoid increases in unemployment. Put differently, if the competitive market wage declines, why don't 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 to both parties. Our hypothesis is that employers will not lower wages correspondingly and that employees will resist such wage cuts. Our experiment casts two subjects in the highly stylized roles of employer and employee. We find at most mild evidence for resistance to wage declines. Instead, the experimental results can be more fruitfully interpreted in terms of an "ultimatum game", in which some surplus between employers and employees is split. In this view, wages and their lack of decline are simply the mechanical tool for accomplishing this split.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1998-073.

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Date of creation: 1998
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Handle: RePEc:dgr:kubcen:1998073

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Web page: http://center.uvt.nl

Related research

Keywords: wage flexibility; ratchet effect (of wages); (wage) bargaining; labour market; ultimatum game; fair wages;

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References

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  1. 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.
  2. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
  3. Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1996. "Involuntary unemployment and non-compensating wage differentials in an experimental labour market," ULB Institutional Repository 2013/5917, ULB -- Universite Libre de Bruxelles.
  4. 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.
  5. Michele Boldrin & Michael Horvath, 1994. "Labor Contracts and Business Cycles," Discussion Papers 1068, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-75, September.
  7. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
  8. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  9. 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.
  10. 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.
  11. Guth, Werner, 1995. "On ultimatum bargaining experiments -- A personal review," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 329-344, August.
  12. 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.
  13. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  14. 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.
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Cited by:
  1. 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.
  2. Christian Calmès, 2005. "Self-Enforcing Labour Contracts and the Dynamics Puzzle," Working Papers 05-1, Bank of Canada.
  3. Truman F. Bewley, 2002. "Fairness, Reciprocity, and Wage Rigidity," Cowles Foundation Discussion Papers 1383, Cowles Foundation for Research in Economics, Yale University.
  4. Bewley, Truman, 2004. "Fairness, Reciprocity, and Wage Rigidity," IZA Discussion Papers 1137, Institute for the Study of Labor (IZA).

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