Resuscitating the wage channel in models with unemployment fluctuations

Abstract

This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science Research Network electronic library at http://ssrn.com/abstract_id=1188502. Wage Dynamics NetworkThis paper contains research conducted within the Wage Dynamics Network (WDN). The WDN is a research network consisting of economists from the European Central Bank (ECB) and the national central banks (NCBs) of the EU countries. The WDN aims at studying in depth the features and sources of wage and labour cost dynamics and their implications for monetary policy. The specific objectives of the network are: i) identifying the sources and features of wage and labour cost dynamics that are most relevant for monetary policy and ii) clarifying the relationship between wages, labour costs and prices both at the firm and macro-economic level.The WDN is chaired by Frank Smets (ECB). Giuseppe Bertola (Università di Torino) and Julian Messina (Universitat de Girona) act as external consultants and Ana Lamo (ECB) as Secretary.The refereeing process of this paper has been co-ordinated by a team composed of Gabriel Fagan (ECB, chairperson), Philip Vermeulen (ECB), Giuseppe Bertola, Julian Messina, Jan Babecký (CNB), Hervé Le Bihan (Banque de France) and Thomas Mathä (Banque centrale du Luxembourg).The paper is released in order to make the results of WDN research generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the author's own and do not necessarily reflect those of the ESCB. ECB Working Paper Series No 923August 2008 Abstract 4

Product market imperfections and employment dynamics

“…If imperfect competition in the product market is important, product market demand shocks 1 Recently, several researchers have incorporated variants of the search-matching model into new Keynesian models with sticky prices; see e.g. Walsh (2005), Krause and Lubik (2007), Christoffel and Kuester (2008), Trigari (2009), and Gertler and Trigari (2009). For a recent review, see Christoffel et al (2008). should be important for employment dynamics.…”

Efficiency in a search and matching model with right-to-manage bargaining

“…per worker are determined at the intersection of demand (8) 10 I follow the calibration strategy in Christo el and Kuester (2008;2009), which is found in the appendix. 11η is a function of the parameters other than ξ and η, therefore ξ = η =η can be chosen if the other parameters are xed.…”

Inflation Dynamics with Labour Market Matching: Assessing Alternative Specifications

“…This section of the paper discusses the role of wage stickiness for in ‡ation dynamics once search and matching frictions in the labour market are accounted for. The related New Keynesian literature is Trigari (2006), Christo¤el and Linzert (2005), Christo¤el and Kuester (2008), and Krause and Lubik (2007). In the model, the role of wage stickiness for in ‡ation dynamics depends on the type of wage bargaining along which the model economy is organised (e¢ cient vs. rightto-manage) as well as on whether wage stickiness a¤ects only existing matches or also new matches (and thus hiring incentives of …rms).…”

“…The corresponding wage equation is obtained by substituting (14), (16) and (17) into (21) and cannot be further simpli…ed. As illustrated by Figure 6 the addition of sunk costs clearly increases vacancy persistence (since vacancies are now a stock variable rather than a ‡ow variable) but, again, the quantitative e¤ects on the dynamic response of in ‡ation to the shock are weak.…”

“…In particular, we assume e¢ cient bargaining, as in Section 2.4, which now implies that both wages and hours will depend on the match-speci…c productivity shock z it . Thus in the analogue to equation (14), a matched …rm's value function is a function of the shock, J t (z it ), and its ‡ow of revenues is x t z it h t (z it ) w t (z it )h t (z it ). A matched worker's value function W t (z it ) also depends on the shock; the worker's ‡ow payo¤s are w t (z it )h t (z it )…”