New study by Laszlo Goerke and Sven Hartmann on "Habit Formation and Trade Unions," published in Oxford Economic Papers.
The assumption that preferences are separable over time, e.g. that the evaluation of today's income does not depend on past income levels, has long since been an important assumption for economic analyses of human behaviour. Empirical findings, however, suggest that an individual’s well-being is not only determined by their current wage, but is also influenced by comparisons with past income. In many cases, employees prefer an increasing wage over time to a decreasing income, even if the sum of all payments is the same in both cases. Accordingly, preferences that are co-determined by comparisons over time have an impact on the behaviour of individuals, as has already been shown for many economically relevant situations. Consequently, they also influence the functioning of labour market institutions.
Building on this insight, Laszlo Goerke and Sven Hartmann examine the extent to which habit preferences change the outcomes of collective bargaining and what the consequences of this are. In their theoretical analysis, the two authors, who work at Trier University and the IAAEU, show that a wage increase today not only leads to a decline in employment, but also implies a negative effect on employees' future utility. This effect thus increases the cost of a wage increase, relative to a wage increase in the future. Habit preferences thus lead to a union favouring an increasing wage level over time, and thus a decreasing employment level, compared to a scenario without habit preferences, with corresponding consequences for collective bargaining. The two authors also show that regulatory changes, such as increases in unemployment benefits, which are only introduced on a transitional basis, have long-term effects on wages and employment due to habit preferences.
The full version of the article can be found here.
The assumption that preferences are separable over time, e.g. that the evaluation of today's income does not depend on past income levels, has long since been an important assumption for economic analyses of human behaviour. Empirical findings, however, suggest that an individual’s well-being is not only determined by their current wage, but is also influenced by comparisons with past income. In many cases, employees prefer an increasing wage over time to a decreasing income, even if the sum of all payments is the same in both cases. Accordingly, preferences that are co-determined by comparisons over time have an impact on the behaviour of individuals, as has already been shown for many economically relevant situations. Consequently, they also influence the functioning of labour market institutions.
Building on this insight, Laszlo Goerke and Sven Hartmann examine the extent to which habit preferences change the outcomes of collective bargaining and what the consequences of this are. In their theoretical analysis, the two authors, who work at Trier University and the IAAEU, show that a wage increase today not only leads to a decline in employment, but also implies a negative effect on employees' future utility. This effect thus increases the cost of a wage increase, relative to a wage increase in the future. Habit preferences thus lead to a union favouring an increasing wage level over time, and thus a decreasing employment level, compared to a scenario without habit preferences, with corresponding consequences for collective bargaining. The two authors also show that regulatory changes, such as increases in unemployment benefits, which are only introduced on a transitional basis, have long-term effects on wages and employment due to habit preferences.
The full version of the article can be found here.
