The Firm as a Community Explaining Asymmetric Behavior and Downward Rigidity of Wages

Chung-cheng Lin () and C.C. Yang
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Chung-cheng Lin: Institute of Economics, Academia Sinica, Taipei, Taiwan, https://www.econ.sinica.edu.tw/
C.C. Yang: Institute of Economics, Academia Sinica, Taipei, Taiwan, https://www.econ.sinica.edu.tw/

No 06-A014, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: This paper models the firm as a community à la Akerlof (1980) to account for asymmetric behavior, and in particular, downward rigidity of wages. It is shown that, through social interaction among workers in the firm community, wage cuts can give rise to a large, discontinuous fall in labor productivity (known as “catastrophe”). Furthermore, this large fall in labor productivity will persist or display inertia (known as “hysteresis”) even if the wages are restored to the pre-cut level and beyond. Our catastrophe/hysteresis finding with respect to wage cuts can rationalize the downward rigidity of wage behavior, and is consistent with the interview evidence of fragile worker morale emphasized by Bewley (1999) and others in explaining why employers are sensitive to and refrain from cutting worker pay.

Keywords: Wage rigidity; Firm community; Catastrophe; Hysteresis (search for similar items in EconPapers)
JEL-codes: A13 E24 J31 J41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-12
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