Abstract
This theoretical note aims at studying the role of reference points in generating unemployment volatility. For this purpose, I introduce the notion of reference points in a standard Mortensen-Pissarides model. I obtain two results. First, I find that the obtained model is similar to the one found by Pissarides in 2009. Second, I show that the introduction of reference points can increase significantly unemployment volatility through a mechanism a la Hagerdorn and Manovskii.
Highlights
IntroductionEconomic studies and laboratory experiments clearly show that reference points play a fundamental role in (wage) negotiations (see, within a large literature, [1]-[3])
Economic studies and laboratory experiments clearly show that reference points play a fundamental role in negotiations
I show that the introduction of reference points can increase significantly unemployment volatility through a mechanism à la Hagerdorn and Manovskii
Summary
Economic studies and laboratory experiments clearly show that reference points play a fundamental role in (wage) negotiations (see, within a large literature, [1]-[3]). [4] pleads in favor of high unemployment benefits while [5] considering additional matching costs The aim of this theoretical note is to draw a link between reference points and the unemployment volatility puzzle. For this purpose, I consider a simple MP model with exogenous separations, reference points and where the partition of the surplus is no longer derived by a Nash bargaining game. I demonstrate that reference points can lower the firm’s profit and increase wage share by improving the outside option of the worker This short article adds reference points to the list of solutions to the Shimer puzzle.
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