() and Steinar Holden
Tore Ellingsen: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Abstract: The paper suggests a channel through which past expectations affect current wage aspirations, leading to real wage rigidity. Expectations have a long run impact on the composition of consumption, because they determine the purchase of durables. Due to adjustment costs, moderate changes in income are absorbed by non-durable consumption only. We show that when labour demand is unexpectedly low, workers are risk seeking; they prefer a risk of becoming unemployed to a substantial reduction of the real wage. Conversely, they show moderation when labour demand is unexpectedly high.
27 pages, July 1995
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