The Role of Real Wage Rigidity and Labor Market Frictions for Inflation Persistence

Abstract

We analyze the transmission mechanism of wages to inflation within a New Keynesian business cycle model with wage rigidities and labor market frictions. Our main focus is on the channel of real wage rigidities on inflation persistence for which we find the specification of the wage bargaining process to be of crucial importance. Under the standard efficient Nash bargaining, the feedback of wage rigidities on inflation is ambiguous and depends on other labor market variables. However, under the alternative right-to-manage bargaining we find that more rigid wages translate directly into more persistent movements of aggregate inflation. Copyright (c) 2010 The Ohio State University.

Divergence in Labor Market Institutions and International Business Cycles

“…This view is consistent with a large bulk of empirical papers in the labor market literature showing that stringent EPL reduce job destruction (as well as job creation), as documented by Cahuc and Zylberberg (2004). A similar interpretation is made in Christoffel and Linzert (2005).…”

“…The right-to-manage setting (where only the real wage is negotiated and firms freely choose hours) is found to better reproduce persistence in wage and inflation dynamics by Christoffel and Linzert (2005) and Christoffel, Küster, and Linzert (2006). Since these are not our primary focus, we rather adopt the efficient Nash-bargaining framework, following so the large bulk of papers in the related literature (see Hairault (2002), Chéron and Langot (2004), Trigari (2004) or Campolmi and Faia (2006) among others).…”

“…As underlined by Christoffel and Linzert (2005), under efficient Nash-bargaining, any change in wage is accompanied by a change in hours, so that the "true" measure of firms' marginal labor cost is not the real wage, but the household's marginal rate of substitution of consumption and leisure (equation (22)). Besides, as shown by μ 1t in equation (23), the monopolistic power of firms allows them to drive the real wage down in the Nashbargaining, since the marginal return of employment is lower than the true employment marginal productivity.…”

“…The budget constraint of the domestic household is reported in equation (9). As in Christoffel and Linzert (2005), we assume that when employed, household members receive the wage payments w 1t h 1t , net of direct…”

To react or not? Technology shocks, fiscal policy and welfare in the EU-3

“…The output gap, yt y , is the most common indicator of economic activity, while the public debt-to-output ratio relative to its long-run value, bt=yt b=y , is an indicator of public …nances. 13 The value of b=y will be assumed to be 60% which is the reference value implicitly required by the Stability and Growth Pact (SGP). Note that our feedback policy rules are also in accordance with Tanzi's suggestion (Tanzi, CESifo Forum, 3/2005, p. 64) that "countercyclical …scal policy should not be abandoned in depressions and it could be tried in milder slowdowns when the …scal accounts of a country are in good initial conditions".…”