The Firm as a Community Explaining Asymmetric Behavior and Downward Rigidity of Wages
AbstractThis paper models the firm as a community à la Akerlof (1980) to account for asymmetric behavior, and in particular, downward rigidity of wages. It is shown that, through social interaction among workers in the firm community, wage cuts can give rise to a large, discontinuous fall in labor productivity (known as “catastrophe”). Furthermore, this large fall in labor productivity will persist or display inertia (known as “hysteresis”) even if the wages are restored to the pre-cut level and beyond. Our catastrophe/hysteresis finding with respect to wage cuts can rationalize the downward rigidity of wage behavior, and is consistent with the interview evidence of fragile worker morale emphasized by Bewley (1999) and others in explaining why employers are sensitive to and refrain from cutting worker pay.
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Bibliographic InfoPaper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 06-A014.
Length: 28 pages
Date of creation: Dec 2006
Date of revision:
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Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
More information through EDIRC
Wage rigidity; Firm community; Catastrophe; Hysteresis;
Find related papers by JEL classification:
- A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
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