Reference Dependence and Labor-Market Fluctuations

Kfir Eliaz and Ran Spiegler ()

No 275783, Foerder Institute for Economic Research Working Papers from Tel-Aviv University > Foerder Institute for Economic Research

Abstract: 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 K˝oszegi 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)).

Keywords: Financial Economics; Labor and Human Capital; Marketing (search for similar items in EconPapers)
Pages: 41
Date: 2012-06
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Reference Dependence and Labor Market Fluctuations (2014)
Chapter: Reference Dependence and Labor Market Fluctuations (2013)
Working Paper: Reference-Dependence and Labor-Market Fluctuations (2013)
Working Paper: Reference Dependence and Labor-Market Fluctuations (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:isfiwp:275783

DOI: 10.22004/ag.econ.275783

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