Salary Matching and Loss Aversion in Job Search

This paper investigates how loss aversion, the tendency to feel the pain of a loss more strongly than the pleasure of an equivalent gain, influences wage negotiations and job switching. It develops a model where employers strategically adjust wages to avoid rejection from loss-averse job seekers. The study's significance lies in its empirical validation of the model's predictions using real-world data and its implications for policy, such as the impact of hiring subsidies and salary history bans. The findings suggest that loss aversion significantly impacts wage dynamics and should be considered in economic models.

• •Loss aversion significantly impacts wage offers and job switching behavior.
• •Employers tend to match current salaries to avoid rejection from loss-averse job seekers.
• •Empirical evidence from Korean administrative data supports the model's predictions.
• •Hiring subsidies may have a reduced impact on wages due to loss aversion.
• •Salary history bans may not fully mitigate the effects of loss aversion.