Relative wage concern: the missing piece in the contract multiplier?

Reference Norms, Staggered Wages, and Wage Leadership: Theoretical Implications and Empirical Evidence*

“…This specification is based on the observation that in their negotiations wage setters typically also care about other nominal variables in a direct fashion (and not only via their impact on current and future price levels). The reasons for such a behavior can be manifold, and various explanations have been proposed in the literature based on relative wages, wage norms, or efficiency wages (see, e.g., Fuhrer and Moore, 1995; Ascari and Garcia, 2004; Hall, 2005; Gertler and Trigari, 2009; Danthine and Kurmann, 2004; de la Croix et al., 2009). Although these models differ in their motivation and also in their particular specification they typically imply an additional role for past‐wage rates.…”

“…There exist some articles that take up this line of thought but they differ in their focus and point of departure and they have also not been clearly connected to the issue of backward indexation. These approaches are based on the assumption that wage setting is influenced by wage norms (Hall, 2005; Gertler and Trigari, 2009) or a concern for relative wages (Buiter and Jewitt, 1981; Fuhrer and Moore, 1995; Ascari and Garcia, 2004). Some articles use an explicit efficiency wage framework where workers’ effort depends on the comparison of the actual wage to some “fair wage” (Danthine and Kurmann, 2004; de la Croix et al., 2009).…”

Inventories, sticky prices, and the persistence of output and inflation

“…To enhance the persistence of inflation, some papers add monetary policy rules (Dittmar, Gavin, and Kydland 2005and Ireland 2001, 2003 and introduce relative real wage concerns (Ben Aissa andMusy 2007, Fuhrer andMoore 1995). Finally, to enhance the persistence of both output and inflation, some papers introduce relative real wage concerns (Ascari and Garcia 2004) and consider habit formation and capacity utilization (Christiano, Eichenbaum, and Evans 2005).…”

Wage Indexation and Inflation Persistence

“…Inflation dynamics still remain a mystery. While theoretical models, starting with Taylor's staggered wage-setting model (Taylor (1979)), Rotemberg's cost-of-adjustment model (Rotemberg (1982)) and the staggered price-setting model developed by Calvo (1983), 1 propose that current inflation rates depend on future expected inflation and on current and future expected measures of excess demand (what has been called the New Phillips Curve), empirical findings have shown that it is very difficult to reject the significant explanatory power of past inflation rates. Gali and Gertler (1999) try to reconcile the New Phillips Curve with the data using a different variable (the labour share) to measure marginal costs instead of the previously used output gap.…”

“…The drawbrack of this approach is that the model is not microfounded and wage setting rules are taken as given. Ascari and Garcia (2000) propose an alternative approach. They develop a theoretical model whose key ingredient is the fact that agents envy other agents' real wages.…”