Reference-Dependence and Labor-Market Fluctuations

Kfir Eliaz and Ran Spiegler ()

No 19085, NBER Working Papers from National Bureau of Economic Research, Inc

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 Kőszegi 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)).

JEL-codes: D03 E24 E32 J64 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-dge and nep-lab
Note: EFG LS
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Citations: View citations in EconPapers (17)

Published as Reference Dependence and Labor Market Fluctuations , Kfir Eliaz, Ran Spiegler. in NBER Macroeconomics Annual 2013, Volume 28 , Parker and Woodford. 2014

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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 (2012)
Working Paper: Reference Dependence and Labor-Market Fluctuations (2012)
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