The paper suggests a channel through which past expectations affect current wage aspirations, leading to real wage rigidity. Expectations have a long run impact on the composition of consumption, because they determine the purchase of durables. Due to adjustment costs, moderate changes in income are absorbed by non-durable consumption only. We show that when labour demand is unexpectedly low, workers are risk seeking; they prefer a risk of becoming unemployed to a substantial reduction of the real wage. Conversely, they show moderation when labour demand is unexpectedly high.
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Length: 27 pages Date of creation: Jul 1995 Date of revision: Handle: RePEc:hhs:hastef:0062
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Find related papers by JEL classification: J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
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