Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/61283
Authors: 
Burda, Michael C.
Güth, Werner
Kirchsteiger, Georg
Uhlig, Harald
Year of Publication: 
1998
Series/Report no.: 
Discussion Papers, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 1998,74
Abstract: 
One of the long-standing puzzles in economics is why wages do not fall sufficiently in recessions so as to avoid increases in unemployment. Put differently, if the competitive market wage declines, why don't employers simply force their employees to accept lower wages as well? As an alternative to reviewing statistical data, we have performed an experiment with a lower competitive wage in the second phase of an employment relationship that is known to both parties. The experiment casts two subjects in the highly stylized roles of employer and employee. Our hypothesis is that employers will not lower wages correspondingly and that employees will resist such wage cuts. We find at most mild evidence for resistance to wage declines. Instead, the experimental results can be more fruitfully interpreted in terms of an 'ultimatum game', in which surplus between employers and employees is shared. In this view, wages and their lack of decline are simply the mechanical tool for accomplishing this split.
Subjects: 
ultimatum game
wage flexibility
wage ratchet effect
wage bargaining
labour market
fair wages
JEL: 
C72
C78
C91
C92
E24
J31
J41
J52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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