Kiel Working Papers, Kiel Institute for World Economics
No 1722:
Sticky wages in search and matching models in the short and long run
Christopher Reicher
Abstract: This paper documents the short run and long run behavior
of the search and matching model with staggered Nash wage bargaining. It
turns out that there is a strong tradeoff inherent in assuming that
previously bargained sticky wages apply to new hires. If sticky wages apply
to new hires, then the staggered Nash bargaining model can generate
realistic volatility in labor input, but it predicts a strong
counterfactually negative long run relationship between inflation and
unemployment. This finding is robust to including a microeconomically
realistic degree of indexation of wages to inflation. The lack of a
negative long run relationship between trend inflation and unemployment
provides indirect evidence against the proposed mechanism that high
inflation systematically makes new hiring more profitable by depressing the
real wages of new hires
Keywords: Sticky wages, staggered Nash bargaining, trend inflation, unemployment, search and matching; (follow links to similar papers)
JEL-Codes: E24,; E25,; J23,; J31; (follow links to similar papers)
28 pages, July 2011
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