Do Emotions Improve Labor Market Outcomes?

Lorenz Götte () and David Huffman
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Lorenz Götte: National University of Singapore
Authors registered in the RePEc Author Service: Lorenz Goette

No 1895, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This chapter argues that the neglect of emotion in economic models explains their inability to predict important aspects of the labor market. We focus on one example: firms frequently cut real wages, increasing nominal wages by less than the inflation rate, but they very seldom cut nominal wages. This pattern suggests that workers exhibit a special resistance to nominal wage cuts, which is hard to explain if they are purely rational as assumed in standard economic models. We argue that resistance to nominal wage cuts is best understood in terms of a model where salient features of a situation trigger emotional responses and sway judgment of the entire situation. Since a cut in the nominal wage leads to a very salient reduction in pay, we argue that the reaction of workers is dominated by emotions. On the other hand, an increase in the nominal wage may produce a more deliberative evaluation, because there is no immediately salient feature. The individual needs to compare the inflation rate to the wage change before it becomes clear whether the change increases or decreases utility, thus producing a more measured response. We present evidence from experiments showing that self-reported emotions respond strongly to nominal wage cuts, but not to decreases in the real wage achieved through increasing the nominal wage by less than the inflation rate. Although emotions may benefit individual workers, by strengthening their bargaining position and preventing wage cuts, they may also lead to worse outcomes, in the form of higher unemployment.

Keywords: money illusion; emotions; affect; wage rigidity; loss aversion (search for similar items in EconPapers)
JEL-codes: B49 E24 E31 E32 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2005-12
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-exp, nep-lab, nep-mac and nep-upt
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Published - published in: Vohs, K.D, Baumeister, R.F; Loewenstein, G. (eds.): Do emotions help or hurt decision making? A Hedgefoxian Perspective, New York, Sage, 2007

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Working Paper: Do Emotions Improve Labor Market Outcomes? (2010)
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