TY  - JOUR
AU  - Eliaz, Kfir
AU  - Spiegler, Rani
TI  - Reference-Dependence and Labor-Market Fluctuations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19085
PY  - 2013
Y2  - May 2013
DO  - 10.3386/w19085
UR  - http://www.nber.org/papers/w19085
L1  - http://www.nber.org/papers/w19085.pdf
N1  - Author contact info:
Kfir Eliaz
School of Economics
Tel Aviv University
Tel Aviv 69978
Israel
E-Mail: kfire@post.tau.ac.il

Ran Spiegler
School of Economics
Tel Aviv University
Tel Aviv 69978
Israel
E-Mail: r.spiegler@ucl.ac.uk
M1  - published as Kfir Eliaz, Ran Spiegler. "Reference Dependence and Labor Market Fluctuations," in Jonathan A. Parker and Michael Woodford, editors, "NBER Macroeconomics Annual 2013, Volume 28" University of Chicago Press (2014)

M3  - presented at "28th Annual Conference on Macroeconomics", April 12-13, 2013
AB  - We incorporate reference-dependent worker behavior into a search-matching model of the labor market, in which firms have all the bargaining power and productivity follows a log-linear AR(1) process. Motivated by Akerlof (1982) and Bewley (1999), we assume that existing workers' output falls stochastically from its normal level when their wage falls below a "reference point", which (following Kőszegi and Rabin (2006)) is equal to their lagged-expected wage. We formulate the model game-theoretically and show that it has a unique subgame perfect equilibrium that exhibits the following properties: existing workers experience downward wage rigidity, as well as destruction of output following negative shocks due to layoffs or loss of morale; newly hired workers earn relatively flexible wages, but not as much as in the benchmark without reference dependence; market tightness is more volatile than under this benchmark. We relate these findings to the debate over the "Shimer puzzle" (Shimer (2005)). 
ER  -