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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1504:
Wage Rigidity and Job Creation

Christian Haefke, Marcus Sonntag and Thijs van Rens

Abstract: Standard macroeconomic models underpredict the volatility of unemployment fluctuations. A common solution is to assume wages are rigid. We explore whether this explanation is consistent with the data. We show that the wage of newly hired workers, unlike the aggregate wage, is volatile and responds one-to-one to changes in labor productivity. In order to replicate these findings in a search model, it must be that wages are rigid in ongoing jobs but flexible at the start of new jobs. This form of wage rigidity does not affect job creation and thus cannot explain the unemployment volatility puzzle

Keywords: Wage Rigidity, Search and Matching Model, Business Cycle; (follow links to similar papers)

JEL-Codes: E24,; E32,; J31,; J41,; J64; (follow links to similar papers)

44 pages, March 2009

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