Working Paper Number

2004-4

Publication Date

2004

Abstract

This paper analyses the inlfuence of norms of fairness on wage formation. Fairness is defined by 'real-wage' and 'relative-wage' norms that relate wage offers to workers' own current wage and to the wages of other groups of workers, and, to avoil shirking, firms pay their wages. The wage norms change endogenously, and the result is hysteresis with respect to both employment and the distribution of wages. An extention of the model that allows 'induced overeducation' may help explain trends in wage inequality.

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