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Labor market dynamics when effort depends on wage growth comparisons

  • de la Croix, David

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))

  • Palm, Franz

    (University of Limburg, Department of Quantitative Economics, Maastricht)

  • Urbain, Jean-Pierre

    (University of Limburg, Department of Quantitative Economics, Maastricht)

We present an efficiency wage model in which workers' effort depends on the level and on the growth rate of their wage relative to an alternative wage. Using data for four countries (US, UK, FR, GY), the implications of the model are examined and are found to be in accordance with the information in the non-stationary data. The restrictions implied by the model dynamics are not rejected by the data. Moreover the structural parameters are found to be constant through time, indicating that, although very simple, the model is likely to be robust to the Lucas critique. One interesting result is that the workers' effort depends less on relative wages growth and more on relative wage levels in the US than in the three European countries analyzed.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1996019.

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Length: 23
Date of creation: 01 Apr 1996
Date of revision: 00 Sep 1996
Handle: RePEc:ctl:louvir:1996019
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