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A Fair Wage Model of Unemployment with Inertia in Fairness Perceptions

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  • George Chouliarakis
  • Mónica Correa-López

Abstract

Theories of psychology and empirical evidence suggest that the reference transactions against which workers judge fairness exhibit inertia. This paper shows that a fair-wage model with inertia in fairness perceptions provides a plausible explanation for the observed negative correlation between changes in productivity growth and equilibrium unemployment over the medium run, a stylized fact that remains elusive to most other classes of models. It also shows that skillbiased productivity shocks and shocks to workers’ taste for equal pay have permanent effects on unemployment and the skill premium. Our quantitative results suggest that the effect of these shocks can be sizeable.

Suggested Citation

  • George Chouliarakis & Mónica Correa-López, 2009. "A Fair Wage Model of Unemployment with Inertia in Fairness Perceptions," Centre for Growth and Business Cycle Research Discussion Paper Series 130, Economics, The Univeristy of Manchester.
  • Handle: RePEc:man:cgbcrp:130
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr130.pdf
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    References listed on IDEAS

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    1. D. Grubb & R. Jackman & R. Layard, 1982. "Causes of the Current Stagflation," Review of Economic Studies, Oxford University Press, vol. 49(5), pages 707-730.
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    3. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
    4. K. W. Rothschild, 1982. "Stagflation," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 8(2), pages 183-194.
    5. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
    6. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps," Harvard Institute of Economic Research Working Papers 1941, Harvard - Institute of Economic Research.
    7. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 300-323, May.
    8. Schlicht, Ekkehart, 1998. "On Custom in the Economy," OUP Catalogue, Oxford University Press, number 9780198292241.
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