Asymmetric reciprocity, reference wage formation, and the theory of wages and unemployment

• Main Author: Fongoni, Marco
• Published: University of Strathclyde 2017
• Subjects: 331.2
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.725161

This thesis contributes to the theory of wages and unemployment through an indepth theoretical analysis of firms' wage setting and hiring decisions and workers'€™ perceptions of fairness and attitude in the production process. Chapter 1 develops a microeconomic theory of wage setting behaviour based on contractual incompleteness, fairness, reciprocity and reference dependence and loss aversion in the evaluation of wage contracts by workers. The chapter makes the following contributions: it provides a theoretical explanation for wage rigidity in a dynamic environment; it offers a psychological foundation for asymmetric reciprocity, identifying loss aversion as the driver of negative reciprocity being stronger than positive reciprocity; and it analyses the implications of “asymmetric reference-dependent reciprocity” and anticipated wage rigidity for optimal wage setting and hiring behaviour. Chapter 2 incorporates the theory developed in Chapter 1 into a canonical search and matching framework and analyses its macroeconomic implications. In so doing the chapter contributes to the literature of labour market fluctuations from a novel behavioural perspective. In contrast to existing theoretical results, in the presence of reference-dependent reciprocity the cyclicality of the hiring wage is shown to be irrelevant for the volatility of vacancies and unemployment. Moreover, the novel behavioural aspects introduced turn out to be qualitatively and quantitatively important in determining the size of the surplus from new employment relationships. Finally, by considering the role of uncertainty, it is shown that the expectation by firms of downward wage rigidity dampens hiring incentives and increases the volatility of both job creation and unemployment Chapter 3 explores the concept of the reference “fair” wage in depth. Building on a large body of research that has explored the concepts of fairness, reference dependence, and social norms and identity, this chapter develops a general, and portable, analytical framework to model reference wage formation. Several inherent properties of the reference wage are formalised: the intrinsic tendency of workers to adapt their reference wage over time; the role of readily available information, which can also be “manipulated” by the firmand/or third parties; and asymmetries in fairness evaluations. This framework is applied to study the implications of asymmetric partial adaptation of the reference wage for wage and reciprocity dynamics; and the effect of relative wage comparisons between newly hired and incumbent workers for the cyclical behaviour of vacancies and unemployment.