Wage Relativities and the Natural Range of Unemployment

Coordination, Fair Treatment and Inflation Persistence

“…The equilibrium of the overall economy can be summarized in the following result (Bhaskar, 1990, derives a similar result). is a symmetric perfect forecast equilibrium, with associated output level y t = m t -ln(µ) -…”

“…When there is a range of possible equilibria, there is scope for past behavior to play a role as an equilibrium selection device. Several possible mechanisms can generate a range of equilibrium; we focus on a wage-contracting model in which (following Bhaskar, 1990) workers care disproportionately more about being paid less than other workers than they do about being paid more than other workers. We argue that as wage setters want to match the wage growth set by others, the behavior of wages in the recent past will be a natural starting point for expectations.…”

“…Following Bhaskar (1990) we assume that workers are concerned with fair treatment, and resent being treated worse than identical workers elsewhere. Furthermore, their dissatisfaction from being paid less than identical workers in other firms is greater than the benefit from being paid more.…”

Implications of Insights from Behavioral Economics for Macroeconomic Models

“…In line with this, the existence of a unique equilibrium has been challenged in a number of contributions based on behavioral assumptions. Bhaskar (1990) considers the implications if workers are concerned about fair treatment, in the sense that they care disproportionately more about being paid less than other workers than they do about being paid more than other workers. This assumption can be defended by evidence suggesting that workers' effort is harmed if they are paid less than the "norm" (Akerlof, 1984), or if workers are loss averse (Kahneman and Tversky, 1979).…”

The Unemployment Problem

“…Bhaskar (1990) shows that under the plausible assumption that the utility loss of workers from a loss in relative wages is greater than the utility gain from an identical gain in relative wages, then there exists a multiplicity of equilibria in the wage setting. The implication of this result is that the wage setting may lead to an outcome with high wages, even if there exist Pareto-superior equilibria with lower wages.…”