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Do internal references lead to wage rigidity?

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  • Matthias Strifler

    (University of Jyväskylä)

Abstract

This paper analyzes three prominent models of internal references and their impact on wage rigidity (Danthine and Kurmann in Scand J Econ 109(4):857–881, 2007; J Monet Econ 57(7):837–850, 2010; Koskela and Schöb in J Econ 96:79–86, 2009). With one exception, these studies find that internal references, nested in reciprocal worker preferences, unambiguously increase wage rigidity. In contrast to that literature, the present study provides analytical proofs, calibration results as well as impulse response functions which show that the effect of internal references on wage rigidity is in fact ambiguous. Several model extensions are discussed and robustness checks conducted. The intuition for this result is similar in all models: as internal and external references are modeled as weighted average, an increase in the weight on the internal reference implies a simultaneous decrease in the weight on the outside option. Therefore, the effect of the internal reference relative to the external reference determines whether wage rigidity increases or decreases.

Suggested Citation

  • Matthias Strifler, 2018. "Do internal references lead to wage rigidity?," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 65(1), pages 15-49, March.
  • Handle: RePEc:spr:inrvec:v:65:y:2018:i:1:d:10.1007_s12232-017-0283-6
    DOI: 10.1007/s12232-017-0283-6
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    More about this item

    Keywords

    Wage rigidity; Internal references; External references; Reciprocity; Fairness; Efficiency wages;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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