A fair wage model of unemployment with inertia in fairness perceptions

George Chouliarakis and Monica Correa-Lopez

Oxford Economic Papers, 2014, vol. 66, issue 1, 88-114

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 skill-biased productivity shocks and shocks to workers' taste for equal pay have permanent effects on unemployment and the skill premium. Thus, skill-biased shocks to productivity increase unemployment among the low-skilled while, if high-skilled workers are less inequity-averse, they reduce unemployment among the high-skilled. Copyright 2014 Oxford University Press 2012 All rights reserved, Oxford University Press.

Date: 2014
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