George A. Akerlof, Hajime Miyazaki; The Implicit Contract Theory of Unemployment meets the Wage Bill Argument, The Review of Economic Studies, Volume 47, Issue

This paper considers how identity, a person's sense of self, affects economic outcomes. We incorporate the psychology and sociology of identity into an economic model of behavior. In the utility function we propose, identity is associated with different social categories and how people in these categories should behave. We then construct a simple game-theoretic model showing how identity can affect individual interactions. The paper adapts these models to gender discrimination in the workplace, the economics of poverty and social exclusion, and the household division of labor. In each case, the inclusion of identity substantively changes conclusions of previous economic analysis.

This paper introduces the fair wage-effort hypothesis and explores its implications. This hypothesis is motivated by equity theory in social psychology and social exchange theory in sociology. According to the fair wage-effort hypothesis, workers proportionately withdraw effort as their actual wage falls short of their fair wage. Such behavior causes unemployment and is also consistent with observed cross-section wage differentials and unemployment patterns.

This paper defines a concept, a worker's trust fund, which is useful in analyzing optimal age-earnings profiles. The trust fund represents what a worker loses if dismissed from a job for shirking. In considering whether to work or shirk, a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort. This concept is used to show that the implicit bonding in upward sloping age-earnings profiles is not a perfect substitute for an explicit up-front performance bond (or employment fee). It is also shown that the second-best optimal earnings profile in the absence of an up-front employment fee pays total compensation in excess of market clearing in a variety of stylized cases.

This paper uses data from the annual Work Experience Survey to construct a new unemployment series based on respondents' recollection of unemployment over the previous year. It is argued that the ratio of this new series to the official series computed from the monthly Current Population Survey provides an index of the “salience” or painfulness of unemployment. Over the past two decades this ratio has declined secularly. About 30 percent of this decrease is due to shifts in the composition of unemployment toward demographic groups with low ratios of remembered to currently reported unemployment. The remainder is due to a secular decline in salience for younger and older people.