Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/223896
Authors: 
Goerke, Laszlo
Year of Publication: 
2020
Series/Report no.: 
IZA Discussion Papers No. 13454
Abstract: 
We analyse the implications of habit formation relating to wages in a multi-period efficiency-wage model. If employees have such preferences, their existence provides firms with incentives to raise wages and reduce employment over time. Greater intensity does not necessarily have the same consequences, because wage adjustments counteract the initial level impact. The firm's response additionally depends on the wage-dependency of dismissal costs since such costs make an increasing wage profile more attractive and mitigate the effects of greater intensity of habit formation. We further show that short-lived productivity shocks have long-lasting wage and employment consequences. Moreover, habit concerns by firm owners reduce wages.
Subjects: 
efficiency wages
habit formation
wage profile
wage rigidity
JEL: 
D90
J31
J41
Document Type: 
Working Paper

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