Are wages rigid, and if so, why? The question raised has attracted economists’ attention ever since Keynes (1936, p. 289) suggested that wages were rigid and could lead to involuntary unemployment (Gächter, 2001, p. 478). This wage rigidity can be defined as the tendency of wages to react slowly, if at all, to excess labour supply and/or demand (Wachtel, 1994, p. 482). Keynes’ theory is at odds with the neoclassical model of the labour market, in which wages are flexible and therefore full employment at a market-clearing wage will ultimately be reached (Fischer and Heier, 1983, p. 56).
Due to the clash between Keynes’ theory and the neoclassical model, a lively discussion among economists arose as to whether wage rigidity existed or not. Some economists, such as Lucas and Rapping (1969, p. 748), claimed that wage rigidity was an illusion and that existing unemployment was voluntary, i.e. real wages were below workers’ reservation wages. Others claimed that wages were rigid and started to implant sociological findings into economic models, which gave further explanations as to why wage rigidity existed.
As a consequence of this debate it became clear that evidence was needed as to which of the models and theories actually applied to real world labour markets. Some economists went about this by conducting surveys in the labour market (see, e.g., Bewley, 1999, and Campbell III. and Kamlani, 1997). Others used experimental methods to simulate labour markets and test theories of wage rigidity for their robustness. Their findings, which generally confirm the sociological approaches to wage rigidity, will be the basis of this paper.
Table of Contents
I. INTRODUCTION
1.1 The History of Wage Rigidity in Economic Thought
1.2 Layout of the Paper
II. SOCIAL NORMS AND THE LABOUR MARKET
2.1 The Neoclassical (Labour) Market
2.2 The Influence of Social Norms
2.2.1 Fairness in the Labour Market
2.2.2 Reciprocity in Wage Bargaining
III. THEORIES OF WAGE RIGIDITY BEYOND THE NEOCLASSICAL LABOUR MARKET
3.1 The Gift Exchange Model
3.2 Fair Wage-Effort Hypothesis
IV. WAGE RIGIDITY IN EXPERIMENTAL ECONOMICS
4.1 The Labour Market in Experimental Economics
4.2 Testing the Model: Theories of Wage Rigidity in Experimental Labour Markets
4.2.1 Experimental Design of Gift-Exchange Games
4.2.2 Experimental Results
4.2.3 Introducing Wage References into the Game
4.2.4 Experimental Evidence
4.3 Social Norms in Experimental Labour Markets: Reciprocal Altruism and Unconditional Fairness vs. Reputation
4.4 The Effect of Third Party Intervention in an Experimental Labour Market
4.5 On the Robustness of Experimental Findings
4.5.1 Real Effort Experiments
4.5.2 The Effects of Social Framing in the Laboratory
4.5.3 Raising the Stakes: The Labour Market as a High Stake Game
V. SUMMARY AND CONCLUSION
Objectives and Topics
This paper examines the influence of social norms on wage bargaining to explain the phenomenon of wage rigidity, challenging the traditional neoclassical model of the labour market. It evaluates whether sociological theories and experimental economic findings provide a more robust understanding of labour market behavior than the rational choice framework.
- The limitations of the neoclassical rational choice model in labour markets.
- The impact of fairness and reciprocity on wage determination.
- The validation of efficiency wage theories (Gift Exchange and Fair Wage-Effort Hypothesis) through experimental design.
- The influence of social framing and third-party interventions on labour market efficiency.
- The transitivity of laboratory experimental results to real-world labour markets.
Excerpt from the Book
1.1 The History of Wage Rigidity in Economic Thought
Are wages rigid, and if so, why? The question raised has attracted economists’ attention ever since Keynes (1936, p. 289) suggested that wages were rigid and could lead to involuntary unemployment (Gächter, 2001, p. 478). This wage rigidity can be defined as the tendency of wages to react slowly, if at all, to excess labour supply and/or demand (Wachtel, 1994, p. 482). Keynes’ theory is at odds with the neoclassical model of the labour market, in which wages are flexible and therefore full employment at a market-clearing wage will ultimately be reached (Fischer and Heier, 1983, p. 56).
Due to the clash between Keynes’ theory and the neoclassical model, a lively discussion among economists arose as to whether wage rigidity existed or not. Some economists, such as Lucas and Rapping (1969, p. 748), claimed that wage rigidity was an illusion and that existing unemployment was voluntary, i.e. real wages were below workers’ reservation wages. Others claimed that wages were rigid and started to implant sociological findings into economic models, which gave further explanations as to why wage rigidity existed.
Summary of Chapters
I. INTRODUCTION: Outlines the historical debate regarding wage rigidity and explains the paper's goal of exploring social norms as a key determinant in labour relationships.
II. SOCIAL NORMS AND THE LABOUR MARKET: Critiques the neoclassical assumption of perfectly rational agents and introduces concepts of fairness and reciprocity as essential drivers in labour markets.
III. THEORIES OF WAGE RIGIDITY BEYOND THE NEOCLASSICAL LABOUR MARKET: Details the Gift Exchange model and the Fair Wage-Effort hypothesis, which explain how non-monetary preferences influence wages.
IV. WAGE RIGIDITY IN EXPERIMENTAL ECONOMICS: Reviews empirical laboratory experiments, including gift-exchange games and third-party interventions, to validate theories of wage rigidity and social norms.
V. SUMMARY AND CONCLUSION: Synthesizes the theoretical and experimental findings, suggesting that the neoclassical model is insufficient and that integrating social norms is vital for understanding involuntary unemployment.
Keywords
Wage Rigidity, Social Norms, Experimental Economics, Labour Market, Gift Exchange Model, Fair Wage-Effort Hypothesis, Reciprocity, Fairness, Involuntary Unemployment, Rational Choice, Efficiency Wages, Social Framing, Incomplete Contracts, Behavioural Economics, Wage Bargaining.
Frequently Asked Questions
What is the central focus of this research?
The paper focuses on understanding why wages often remain rigid instead of clearing the market, by exploring the role of social norms, reciprocity, and fairness within labour relationships.
What are the primary themes discussed?
Key themes include the critique of neoclassical rational choice theory, the role of gift-exchange and equity preferences, and the use of laboratory experiments to simulate labour market outcomes.
What is the primary research goal?
The goal is to determine if incorporating sociological findings and social norms can explain wage rigidity more effectively than traditional economic models.
Which scientific methodology is utilized?
The work employs a review of existing theoretical efficiency wage models alongside an analysis of experimental economics, specifically using data from laboratory experiments like gift-exchange and ultimatum games.
What topics are covered in the main section?
The main section evaluates specific models like the Gift Exchange model and the Fair Wage-Effort hypothesis, supported by experimental evidence regarding third-party interventions and real-effort tasks.
Which keywords best characterize this work?
Primary keywords include wage rigidity, social norms, experimental economics, reciprocity, fairness, and behavioural labour market analysis.
How do social norms affect the effectiveness of high wages?
The paper demonstrates that high wages only lead to increased effort if the wage is perceived as a "gift" or a fair action by the employer; otherwise, if mandated or perceived as impersonal, the efficiency gains may not materialize.
Is experimental evidence from students reliable for real-world labour markets?
The research discusses the impact of social framing and concludes that while student data is useful, different subject pools (like workers) exhibit different social norm adherence, suggesting researchers should remain cautious but affirming that these findings are generally robust.
- Quote paper
- Anne-Kathrin Wippermann (Author), 2006, Wage Rigidity and Social Norms in Experimental Labour Markets, Munich, GRIN Verlag, https://www.grin.com/document/57064
