Reference Dependence and Labor Market Fluctuations
Chapter in NBER book NBER Macroeconomics Annual 2013, Volume 28 (2014), Jonathan A. Parker and Michael Woodford, editors (p. 159 - 200)
We incorporate reference-dependent worker behavior into a search-matching model of the labor market, in which firms have all the bargaining power and productivity follows a log-linear AR(1) process. Motivated by Akerlof (1982) and Bewley (1999), we assume that existing workers’ output falls stochastically from its normal level when their wage falls below a "reference point", which (following Köszegi and Rabin 2006) is equal to their lagged-expected wage. We formulate the model game-theoretically and show that it has a unique subgame perfect equilibrium that exhibits the following properties: existing workers experience downward wage rigidity, as well as destruction of output following negative shocks due to layoffs or loss of morale; newly hired workers earn relatively flexible wages, but not as much as in the benchmark without reference dependence; market tightness is more volatile than under this benchmark. We relate these findings to the debate over the “Shimer puzzle” (Shimer 2005).
You may be able to access the full text of this document via the Document Object Identifier.
This paper was revised on June 4, 2013
Document Object Identifier (DOI): 10.1086/674596This chapter first appeared as NBER working paper w19085, Reference-Dependence and Labor-Market Fluctuations, Kfir Eliaz, Rani Spiegler
Commentary on this chapter:
Comment, Robert E. Hall
Comment, Giuseppe Moscarini
Users who downloaded this chapter also downloaded these: