Journal Article

Endogenous real wage rigidity in a search frictions model

Christopher Martin and Bingsong Wang

in Oxford Economic Papers

Volume 70, issue 4, pages 1016-1035
Published in print October 2018 | ISSN: 0030-7653
Published online June 2018 | e-ISSN: 1464-3812 | DOI: https://dx.doi.org/10.1093/oep/gpy023
Endogenous real wage rigidity in a search frictions model

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  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Prices, Business Fluctuations, and Cycles
  • Demand and Supply of Labour
  • Wages, Compensation, and Labour Costs
  • Mobility, Unemployment, and Vacancies

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Abstract

The existing literature often incorporates ad hoc models of exogenous real wage rigidity into search frictions models of the labour market in order to match the large volatility of unemployment observed in the data. In this paper, we develop an alternative version of the search frictions model that incorporates insights from behavioural economics. We derive a model in which endogenous real wage rigidity emerges from optimal wage-setting and show that this model can match the observed volatility of unemployment. Thus our proposed model can match the data as closely as the existing literature but without the disadvantage of assuming exogenous and ad hoc forms of real wage rigidity.

Keywords: E23; E32; J23; J30; J64

Journal Article.  10779 words. 

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Prices, Business Fluctuations, and Cycles ; Demand and Supply of Labour ; Wages, Compensation, and Labour Costs ; Mobility, Unemployment, and Vacancies

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