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The firm as a community explaining asymmetric behavior and downward rigidity of wages

  • Lin, Chung-cheng
  • Yang, C.C.
Registered author(s):

    This paper models the firm as a community à la Akerlof [Akerlof, G.A., 1980. A theory of social custom, of which unemployment may be one consequence. Quarterly Journal of Economics 94, 749-775] 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 [Bewley, T.F., 1999. Why Wages Don't Fall During a Recession. Harvard University Press, Cambridge] and others in explaining why employers are sensitive to and refrain from cutting worker pay.

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    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 68 (2008)
    Issue (Month): 2 (November)
    Pages: 390-400

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    Handle: RePEc:eee:jeborg:v:68:y:2008:i:2:p:390-400
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    1. Harry J. Holzer & Edward B. Montgomery, 1990. "Asymmetries and Rigidities in Wage Adjustments by Firms," NBER Working Papers 3274, National Bureau of Economic Research, Inc.
    2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    3. Agell, Jonas & Lundborg, Per, 1993. "Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Working Paper Series 380, Research Institute of Industrial Economics.
    4. Palfrey, Thomas R., 2002. "Implementation theory," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 61, pages 2271-2326 Elsevier.
    5. Albrecht, James W & Vroman, Susan B, 1998. "Nash Equilibrium Efficiency Wage Distributions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 183-203, February.
    6. Alan S. Blinder & Don H. Choi, 1989. "A Shred of Evidence on Theories of Wage Stickiness," NBER Working Papers 3105, National Bureau of Economic Research, Inc.
    7. Strand, Jon, 1987. "Unemployment as a Discipline Device with Heterogeneous Labor [Equilibrium Unemployment as a Worker Discipline Device]," American Economic Review, American Economic Association, vol. 77(3), pages 489-93, June.
    8. Carl M. Campbell III & Kunal S. Kamlani, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 759-789.
    9. Lindbeck, Assar & Snower, Dennis J., 1987. "Cooperation, Harassment, and Involuntary Unemployment: An Insider-Outsider Approach," CEPR Discussion Papers 196, C.E.P.R. Discussion Papers.
    10. Bewley, Truman F., 1998. "Why not cut pay?," European Economic Review, Elsevier, vol. 42(3-5), pages 459-490, May.
    11. Summers, Lawrence H. & Dickens, William T. & Katz, Lawrence F. & Lang, Kevin, 1989. "Employee Crime and the Monitoring Puzzle," Scholarly Articles 3645199, Harvard University Department of Economics.
    12. Ernst Fehr & Simon Gaechter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," CESifo Working Paper Series 336, CESifo Group Munich.
    13. Elster, Jon, 1989. "Social Norms and Economic Theory," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 99-117, Fall.
    14. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
    15. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    16. Eldar Shafir & Peter Diamond & Amos Tversky, 1997. "Money Illusion," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 341-374.
    17. Peter Howitt, 2002. "Looking Inside the Labor Market: A Review Article," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 125-138, March.
    18. George A. Akerlof, 1980. "A Theory of Social Custom, of which Unemployment may be One Consequence," The Quarterly Journal of Economics, Oxford University Press, vol. 94(4), pages 749-775.
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