Employment Duration and Resistance to Wage Reductions: Experimental Evidence

One of the long-standing questions in economics is whether or not wages will fall sufficiently in recessions so as to avoid increases in unemployment. Put differently, if the competitive market wage declines, will 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 and can thus be (rationally) anticipated by both parties. The experiment casts two subjects in the highly stylized roles of employer and employee. For the hypothesis that employers will not lower wages correspondingly and that employees will resist such wage cuts we find at most mild evidence. Instead, the experimental results can be more fruitfully interpreted in terms of an ôultimatum gameö, in which surplus between employers and employeesááá is shared. In this view, wages and their lack of decline are simply the mechanical tool for accomplishing this split.