Employment Duration and Resistance to Wage Reductions: Experimental Evidence

CentER Working Paper No. 73

Posted: 8 Feb 2000

See all articles by M. Burda

M. Burda

Tilburg University, CentER

Werner Guth

Max Planck Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Georg Kirchsteiger

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); CESifo (Center for Economic Studies and Ifo Institute)

Harald Uhlig

University of Chicago - Department of Economics

Date Written: 1998

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.

JEL Classification: C72, C78, C91, C92, E24, J31, J41, J52

Suggested Citation

Burda, M. and Güth, Werner and Kirchsteiger, Georg and Uhlig, Harald, Employment Duration and Resistance to Wage Reductions: Experimental Evidence (1998). CentER Working Paper No. 73. Available at SSRN: https://ssrn.com/abstract=166464

M. Burda

Tilburg University, CentER

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Werner Güth

Max Planck Institute of Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Georg Kirchsteiger (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Av. F. D. Roosevelt 50
CP 114
Brussels, B-1050
Belgium

HOME PAGE: http://www.ecares.org/people/members/kirchsteiger/kirchsteiger/home.htm

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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