An Efficiency-Wage Model with Habit Concerns About Wages

35 Pages Posted: 28 Jul 2020

See all articles by Laszlo Goerke

Laszlo Goerke

University of Trier - Institute of Labour Law and Industrial Relations in the European Union; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

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Date Written: 2020

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.

JEL Classification: D900, J310, J410

Suggested Citation

Goerke, Laszlo, An Efficiency-Wage Model with Habit Concerns About Wages (2020). CESifo Working Paper No. 8428, Available at SSRN: https://ssrn.com/abstract=3653953

Laszlo Goerke (Contact Author)

University of Trier - Institute of Labour Law and Industrial Relations in the European Union ( email )

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