Journal Article

A fair wage model of unemployment with inertia in fairness perceptions

George Chouliarakis and Mónica Correa-López

in Oxford Economic Papers

Volume 66, issue 1, pages 88-114
Published in print January 2014 | ISSN: 0030-7653
Published online November 2012 | e-ISSN: 1464-3812 | DOI: https://dx.doi.org/10.1093/oep/gps041
A fair wage model of unemployment with inertia in fairness perceptions

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  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Wages, Compensation, and Labour Costs
  • Microeconomics
  • Human Resource Management

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Theories of psychology and empirical evidence suggest that the reference transactions against which workers judge fairness exhibit inertia. This paper shows that a fair-wage model with inertia in fairness perceptions provides a plausible explanation for the observed negative correlation between changes in productivity growth and equilibrium unemployment over the medium run, a stylized fact that remains elusive to most other classes of models. It also shows that skill-biased productivity shocks and shocks to workers’ taste for equal pay have permanent effects on unemployment and the skill premium. Thus, skill-biased shocks to productivity increase unemployment among the low-skilled while, if high-skilled workers are less inequity-averse, they reduce unemployment among the high-skilled.

Keywords: D03; E24; J31; M12

Journal Article.  10569 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Wages, Compensation, and Labour Costs ; Microeconomics ; Human Resource Management

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