Asymmetric Reciprocity and the Cyclical Behaviour of Wages, Effort and Job Creation

Fongoni, Marco

doi:10.1257/mac.20200321

Abstract

This paper develops a search and matching framework in which workers are characterised by asymmetric reference-dependent reciprocity, and firms set wages by considering the effect that these can have on workers’ effort, and therefore on output. The cyclical response of effort to wage changes can considerably amplify shocks, independently of the cyclicality of the hiring wage, which becomes irrelevant for unemployment volatility; and firms’ expectations of downward wage rigidity in existing jobs increases the volatility of job creation. The model is consistent with evidence on hiring and incumbents’ wage cyclicality, and provides novel predictions on the dynamics of effort.

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Asymmetric Reciprocity and the Cyclical Behaviour of Wages, Effort and Job Creation

Abstract

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