Norms and ad hoc calculations in wage setting

Wage setting is commonly modelled as the outcome of a rational process by informed actors. Even when allowing for imperfections, such as bargaining or asymmetric information models, the decision-making process is assumed to be objective and precise. This allows a range of labour market behaviours, from job search to executive pay, to be modelled and analysed with clear predictions and policy implications.

This paper proposes that there is little evidence to support this characterisation. Theoretically, the assumptions required for rational decision-making are so restrictive as to make such models of limited value. Empirically, there appears to be very little relationship between earnings and productivity; there are however clear indications that social influences, personal responses and institutional factors play a key role in wage setting. In short, human beings act like humans, producing wage distributions that are demonstrably different from predictions of more neoclassical models.

Using the example of earnings near minimum wages, the paper demonstrates that social norms, satisficing activities and ad hoc decision-making are essential components in any model of wages. Building more relativistic models can help to provide a deeper understanding of labour market behaviour.

To RSVP and for Seminar Enquiries:

Email: l.pieri [at] niesr.ac.uk

Tel: 020 7654 1931

Speaker: Felix Ritchie, Bristol Business School, University of the West of England, Bristol
Date: Wednesday 28nd January 2015

Time: 12.00pm-1.15pm, followed by a light lunch

Venue: NIESR, 2 Dean Trench St, Smith Square, London SW1P 3HE