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Employment duration and resistance to wage reductions: Experimental evidence

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  • Burda, Michael C.
  • Güth, Werner
  • Kirchsteiger, Georg
  • Uhlig, Harald

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. The experiment casts two subjects in the highly stylized roles of employer and employee. Our hypothesis is that employers will not lower wages correspondingly and that employees will resist such wage cuts. 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 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

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1998,74.

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Date of creation: 1998
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Handle: RePEc:zbw:sfb373:199874

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

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  1. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(4), pages 666-89, August.
  2. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
  3. 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.
  4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 97-109, January.
  5. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, American Economic Association, vol. 71(5), pages 896-908, December.
  6. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(2), pages 437-59, May.
  7. Oswald, Andrew J, 1985. " The Economic Theory of Trade Unions: An Introductory Survey," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 87(2), pages 160-93.
  8. Gary Solon & Robert Barsky & Jonathan A. Parker, 1992. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias," NBER Working Papers 4202, National Bureau of Economic Research, Inc.
  9. Michele Boldrin & Michael Horvath, 1994. "Labor Contracts and Business Cycles," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1068, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. 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.
  11. Guth, Werner, 1995. "On ultimatum bargaining experiments -- A personal review," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 27(3), pages 329-344, August.
  12. 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.
  13. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, Econometric Society, vol. 21(1), pages 128-140, April.
  14. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 250-54, May.
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Cited by:
  1. Christian Calmès, 2005. "Self-Enforcing Labour Contracts and the Dynamics Puzzle," Working Papers, Bank of Canada 05-1, Bank of Canada.
  2. Bewley, Truman, 2004. "Fairness, Reciprocity, and Wage Rigidity," IZA Discussion Papers 1137, Institute for the Study of Labor (IZA).
  3. Truman F. Bewley, 2002. "Fairness, Reciprocity, and Wage Rigidity," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1383, Cowles Foundation for Research in Economics, Yale University.
  4. 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.

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