Showing papers by "Lorenz Goette published in 2005"

Do Workers Work More if Wages are High? Evidence from a Randomized Field Experiment

Abstract: Most previous studies on intertemporal labor supply found very small or insignificant substitution effects. It is not clear, however, whether these results are due to institutional constraints on workers' labor supply choices or whether the behavioral assumptions of the standard life cycle model with time separable preferences are empirically invalid. We conducted a randomized field experiment in a setting in which workers were free to choose their working times and their efforts during working time. We document a large positive wage elasticity of overall labor supply and an even larger wage elasticity of labor hours, which implies that the wage elasticity of effort per hour is negative. While the standard life cycle model cannot explain the negative effort elasticity, we show that a modified neoclassical model with preference spillovers across periods and a model with reference dependent, loss averse preferences are consistent with the evidence. With the help of a further experiment we can show that only loss averse individuals exhibit a significantly negative effort response to the wage increase and that the degree of loss aversion predicts the size of the negative effort response.

Micro evidence on the adjustment of sticky-price goods: it's how often, not how much

Abstract: We use a unique panel data set to analyse price setting in restaurants in Switzerland 1977-1993, for items known to have sticky prices. The macroeconomic environment during this time period allows us to examine how firms adjust prices at low (0%) and fairly high (7%) inflation. Our results indicate that firms strongly react to inflation in the timing of their price adjustment: hazard of price changes is increasing with time and becomes steeper at higher inflation rates. However, we find little evidence that the amount by which they change the price responds to the inflation rate.

Micro Evidence on the Adjustment of Sticky-Price Goods: It's How Often, Not How Much

Abstract: We use a unique panel data set to analyse price setting in restaurants in Switzerland 1977-93, for items known to have sticky prices. The macroeconomic environment during this time period allows us to examine how firms adjust prices at low (0%) and fairly high (7%) inflation. Our results indicate that firms strongly react to inflation in the timing of their price adjustment: hazard of price changes is increasing with time and becomes steeper at higher inflation rates. However, we find little evidence that the amount by which they change the price responds to the inflation rate.

Do Emotions Improve Labor Market Outcomes

Abstract: Traditionally, models of economic decision-making assume that individuals are rational and emotionless. This chapter argues that the neglect of emotion in economic models explains their inability to predict important aspects of the labor market. We focus on one example: the scarcity of nominal wage cuts. Firms frequently cut real wages of workers, by increasing nominal wages by less than the inflation rate, but seldom cut nominal wages, in contrast to the predictions of the standard, rational model. This pattern suggests that workers exhibit a special resistance to nominal wage cuts, which is hard to explain if they are purely rational. We argue that strong resistance to nominal wage cuts is best understood in terms of a model where, consistent with evidence from psychology and neuroscience, salient features of a situation trigger emotional responses and sway judgment of the entire situation. Since a cut in the wage is a very salient feature, we argue that cutting the nominal wage leads to a reaction that is mainly dominated by emotions. On the other hand, we hypothesize that an increase in the nominal wage produces a more deliberative evaluation, because there is no immediately salient feature: the individual needs to compare the inflation rate to the wage change before it becomes clear whether the change increases or decreases utility, thus producing a more measured response. We present evidence from experiments that supports this argument: self-reported emotions such as anger and surprise respond strongly to nominal wage cuts, but not to decreases in the real wage achieved through increasing the nominal wage by less than the inflation rate. Although emotions may benefit individual workers, by strengthening their bargaining position and preventing wage cuts, we argue that overall impact on labor market outcomes is ambiguous, because a survey of the evidence suggests that higher wages tend to lead to higher unemployment.