Labor market dynamics with search frictions and fair wage considerations
( Economic Inquiry, 55:3, 1336-1349.)
Pei Kuanga Tong Wangb,∗
a Department of Economics, University of Birmingham, B152TTUK
b School of Economics, Shandong University, 27 Shanda Nanlu, Jinan, 250100, China
Fairness considerations in wage setting can improve the ability of the Diamond‐Mortensen‐Pissarides search and matching model to account for U.S. labor m arket dynamics. Firms' production is influenced by workers' effort input, which depends on whether workers consider the employment relation as fair. A typical wor ker's effort is determined in a comparison of individual current wage with wage norms, including the outside option, the individual past wage, and the wage level in the steady state. The fairness considerations in the search framework give rise to endogenous real wage rigidity, and realistic volatilities of unemployment, vacancies, and labor market tightness.
