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A Fair Wage Model of Unemployment with Inertia in Fairness Perceptions

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  • George Chouliarakis
  • Mónica Correa-López

Abstract

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 skillbiased productivity shocks and shocks to workers’ taste for equal pay have permanent effects on unemployment and the skill premium. Our quantitative results suggest that the effect of these shocks can be sizeable.

Suggested Citation

  • George Chouliarakis & Mónica Correa-López, 2009. "A Fair Wage Model of Unemployment with Inertia in Fairness Perceptions," Centre for Growth and Business Cycle Research Discussion Paper Series 130, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:130
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    References listed on IDEAS

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