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Employment Duration and Resistance to Wage Reductions: Experimental Evidence
Burda,M. Güth,W. Kirchsteiger,G. Uhlig,H.F.H.V.S.
Burda,M.
Güth,W.
Kirchsteiger,G.
Uhlig,H.F.H.V.S.
Abstract
One of the long-standing puzzles in economics is why wages do not fall sufficiently in recessions so as to avoid increases in unemployment. Put differently, if the competitive market wage declines, why don't employers simply force their employees to accept lower wages as well? As an alternative to reviewing statistical data we have performed an experiment with a lower competitive wage in the second phase of an employment relationship that is known to both parties. Our hypothesis is that employers will not lower wages correspondingly and that employees will resist such wage cuts. Our experiment casts two subjects in the highly stylized roles of employer and employee. We find at most mild evidence for resistance to wage declines. Instead, the experimental results can be more fruitfully interpreted in terms of an "ultimatum game", in which some surplus between employers and employees is split. In this view, wages and their lack of decline are simply the mechanical tool for accomplishing this split.
Description
Pagination: 31
Date
1998
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Publisher
Vakgroep CentER
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73.pdf
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Keywords
wage flexibility, ratchet effect (of wages), (wage) bargaining, labour market, ultimatum game, fair wages, C72 - Noncooperative Games, C78 - Bargaining Theory ; Matching Theory, C91 - Laboratory, Individual Behavior, C92 - Laboratory, Group Behavior, E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity, J31 - Wage Level and Structure ; Wage Differentials, J41 - Labor Contracts, J52 - Dispute Resolution: Strikes, Arbitration, and Mediation ; Collective Bargaining, SDG 1 - No Poverty, SDG 8 - Decent Work and Economic Growth, SDG 10 - Reduced Inequalities
Citation
Burda, M, Güth, W, Kirchsteiger, G & Uhlig, H F H V S 1998 'Employment Duration and Resistance to Wage Reductions : Experimental Evidence' CentER Discussion Paper, vol. 1998-073, Vakgroep CentER, Tilburg.