Can reference points explain wage rigidity? Experimental evidence

I examine whether reference points can provide an explanation for rigid wages in recessions. Even though a recession provides a good reason to adjust wages downward, workers' perception of a fair wage may depend on their previous wage, their reference point. Using a laboratory experiment, I test this idea by varying whether initially concluded contracts-and their stipulated wages-can serve as reference points. My experimental results show that with initial contracts workers punish wage cuts even in recessions, leading to considerable more rigid wages. Surprisingly, this is even true without an objective justification to feel entitled to initial contracts.

Automated summary

During recessions, workers may resist wage cuts due to their perception of fair wages being influenced by their previous wages, or reference points. Experimental results demonstrate that workers tend to punish wage cuts even without objective justification, leading to more rigid wages.