An Efficiency-Wage Model with Habit Concerns about Wages

Laszlo Goerke

No 13454, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We analyse the implications of habit formation relating to wages in a multi-period efficiency-wage model. If employees have such preferences, their existence provides firms with incentives to raise wages and reduce employment over time. Greater intensity does not necessarily have the same consequences, because wage adjustments counteract the initial level impact. The firm's response additionally depends on the wage-dependency of dismissal costs since such costs make an increasing wage profile more attractive and mitigate the effects of greater intensity of habit formation. We further show that short-lived productivity shocks have long-lasting wage and employment consequences. Moreover, habit concerns by firm owners reduce wages.

Keywords: wage profile; habit formation; efficiency wages; wage rigidity (search for similar items in EconPapers)
JEL-codes: D90 J31 J41 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020-07
New Economics Papers: this item is included in nep-lma
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Published - published as 'Habit Formation and Wage Determination' in: Managerial and Decision Economics, 2021, 42 (1), 61-76

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Related works:
Working Paper: An Efficiency-Wage Model with Habit Concerns about Wages (2020)
Working Paper: An Efficiency-wage Model with Habit Concerns About Wages (2020)
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