Labor market dynamics with search frictions and fairwage considerations

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Fairness considerations in wage setting can improve the ability of the Diamond-Mortensen-Pissarides search and matching model to account for U.S. labor market dynamics. Firms’ production is influenced by workers’ effort input, which depends on whether workers consider the employment relation as fair. A typical worker’s effort is determined in a comparison of individual current wage with wage norms, including the outside option, the individual past wage, and the wage level in the steady state. The fairness considerations in the search framework give rise to endogenous real wage rigidity, and realistic volatilities of unemployment, vacancies,
and labor market tightness.


Original languageEnglish
Pages (from-to)1336-1349
JournalEconomic Inquiry
Issue number3
Early online date17 Feb 2017
Publication statusPublished - 29 May 2017


  • Search and matching frictions , Fair wage , Real wage rigidity , Unemployment