Wage rigidity and destabilizing spirals

This paper investigates the impact of real wage rigidity on the (de)stabilizing role of demand feedback. I show that destabilizing supply–demand feedback driven by countercyclical precautionary savings demand against uninsured unemployment risk is fundamentally a matter of rigid real wage adjustments over business cycles. Given the estimated wage rigidity consistent with aggregate labor market dynamics in the United States, the quantitative results suggest that the unemployment risk channel has a minor impact on aggregate volatility.     

Imperfect Competition and the Gains from Trade in a Macro Duopoly Model

A general-equilibrium duopoly trade model is developed. In the micro model, constant-elasticity market demand curves produce backward-bending reaction functions. This is combined with a macro analysis in which the real wage is determined competitively, while nominal variables depend on the money supply. Trade can lead to large increases in aggregate output, employment, and real wages. The gains from trade are the result of increases in market size, and greater competition in each market. The benefits of trade are largest when marginal-cost curves slope downward and the labor supply curve is elastic.     

Wage indexation and the unemployment-inflation trade-off

A variety of wage indexation schemes are analyzed in the context of a simple dynamic disequilibrium macroeconomic model. These indexation schemes include rigid money wages (zero indexation), rigid real wages (full indexation), and intermediate cases (partial indexation). In a situation of unemployment, aggregate demand increases produce the most desirable results under rigid money wages. In a situation of excess demand for labor, aggregate demand increases produce the least desirable effects under rigid money wages. Mixed indexation schemes, in which money or real wages are rigid downward, are also examined as are the effects of stop-go policies.     

A consistent model of the expectations augmented Phillips curve and inflation

The usual version of the expectations-augmented Phillips curve is shown to contain several inconsistencies. In particular, it does not take account of the dependence of labor demand and supply on the real wage, nor does it treat the goods and labor markets symmetrically. When the model is revised to meet these points, it is found that standard accelerationist results are largely unaffected. However, the important issue as to whether inflation accelerates depends not on wage but on price behavior. A unit coefficient on the expectations variable in the wage equation is seen to be irrelevant to this question.     

Migration and Wage‐setting: Reassessing the Labor Market Effects of Migration*

In this paper we employ a wage‐setting approach to analyze the labor market effects of immigration into Germany from 1980 to 2004. This enables us to consider labor market rigidities, which are prevalent in Europe. We find that the elasticity of the wage‐setting curve is particularly high for young workers. Moreover, natives and foreigners are imperfect substitutes. The wage and employment effects of immigration depend on the skill structure of the immigrant workforce. Because the foreign labor supply shift has mainly affected the high‐skilled labor market segment, the 4 percent increase of the workforce through immigration has not increased either aggregate or foreign unemployment.     

Learning to believe in nonrational expectations that support pareto-superior outcomes

I consider the prototype New Keynesian macroeconomic model with subjective demand expectations of firms. In this model the firms' objective demand is log-linear in their relative price. Firms believe that their demand curve is linear or log-linear in their absolute price. They estimate the parameters of this curve by least squares from past observations on prices and quantities. The wage rate either clears the labor market given firms' demand perceptions or is given in the short run and changes according to a linear Phillips curve. In either setup of the model the interplay between learning and price setting confirms the subjective model. Among the long-run equilibria are solutions at which the representative household attains a higher level of utility as compared to the rational-expectations outcome. If the supply of labor depends upon the real wage, money is not neutral.     

FROM INDIVIDUAL TO AGGREGATE LABOR SUPPLY: A QUANTITATIVE ANALYSIS BASED ON A HETEROGENEOUS AGENT MACROECONOMY*

At the aggregate level, the labor‐supply elasticity depends on the reservation‐wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross‐sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor‐supply elasticity of such an economy is around 1, greater than a typical micro estimate.     

Partial wage indexation with real shocks

This note analyzes wage indexation from a macroeconomic viewpoint. Its purpose is to examine when wage indexation should be partial in the presence of real shocks, and it shows how the conditions for this to be the case depend on the aggregate production function, the income velocity of money, and the labor supply.     

The estimation of a disequilibrium real wage equation for Britain

An aggregate wage equation is formulated based on a disequilibrium labor market model. The specification allows for an important special case to be tested, namely the equilibrium hypothesis that real wages move instantaneously to equate the demand for and supply of labor. The hypothesis that the British labor market has been in equilibrium is rejected. The adjustment path for real wages is monotonic and dominated by demand factors. Real wages move quickly to eliminate excess demand but the results contradict the monetarist contention that the aggregate labor market is continuously in a temporary, if not full, equilibrium.     

Immigration Policy,Self‐selection,and the Quality of Immigrants*

This paper investigates the effects of immigration quotas on the average quality of immigrants by developing a human capital migration model where efficiency in migration depends on skills and emigration rates are higher among skilled workers. Studying the joint determination of the domestic level of wages and immigrants' self‐selection, we find a negative relationship between the wage level and the percentage of educated workers among immigrants, which results in a nonstandard downward‐sloping labor supply. In our framework, a higher quota increases the skill mix of immigrants through its negative effect on wages and raises aggregate national income.     

Wage and price differences,technology gap and labor flow dynamics

The relationship between wage difference and relative employment is a very important issue in the field of economic structural change. An M-sector economic growth model is constructed in this paper to investigate the relationship between wage difference, price difference, technology gap, relative employment and sectoral dynamic change from the perspective of technologies. Labor flow is regarded as a decision-making behavior to maximize the benefits of economic agents. The benefits of labor flow mainly come from sectoral wage difference, and the costs of labor flow mainly come from the social resource expenditure during labor flow process. Our model illustrates that: (i) the relative employment is positively correlated with the real wage difference and technology gap; (ii) the sectoral dynamic changes coexist with the aggregate economic growth; (iii) increases in technology gap, and price and wage differences will stimulate labor migration, exacerbate the unbalanced growth of sectoral economies, and lead to faster and more effective aggregate economic growth.     

Wage discrimination and population composition in the long run

We derive the conditions that sign the effects of changing population composition on wage levels and ratios, when labor supply and discrimination preferences vary. The overall effect depends on an aggregate market, a relative market, and a preference distribution effect.     

Wage and price controls in the equilibrium sequential search model

In this paper, we study the effects of wage and price controls on employment, output, and welfare in a simplified version of the Bénabou (J. Econom. Theory 60 (1993) 140) equilibrium sequential search model with bilateral heterogeneity. We show that a price ceiling increases output but the change in welfare depends on three effects: the reduction in aggregate search costs, the increase in surplus due to increased output, and the transfer of production to the least efficient firm. The model is formally identical to a standard equilibrium search model of the labor market so analogous results hold for the minimum wage.     

结构变迁与工资差距

本文构建一个现代部门技术选择内生的经济结构转变模型,来讨论结构变迁(经济结构转变)与熟练工人和非熟练工人间工资差距的关系.由于现代部门的技术选择内生于劳动力市场的供给结构,经济结构转变既影响劳动力市场的供给结构,又影响其需求结构.本文认为,在经济结构转变过程中,现代部门通过调整其技术结构,可以增加对传统部门剩余劳动力的需求,加快经济增长,同时缩小工资差距.     

Exploring different measures of wage flexibility in a developing economy context: the case for Turkey

In this paper we use Turkish household labor force data to address a number of conceptual issues pertaining to the wage curve, an empirically derived negative relationship between the real wage level and the local unemployment rate. First, we show that in developing economies where labor markets are prone to high degree of segmentation by skill level, local unemployment rates disaggregated by education provide more accurate measures of the degree of group-specific wage competition and hence yield more robust results of the wage curve analyses. Second, we estimate the wage curve using various definitions of the unemployment rate, including discouraged and marginally attached workers, and the long-term unemployment rate to explore the most relevant measure of local labor market tension in the wage setting process. We find that broader definitions of unemployment serve as a more effective reference point in measuring wage flexibility for women, whose attachment to the labor market is substantially weak in the Turkish context; while for men the official and long-term unemployment rates perform well. Finally, using quantile regression we show that wage responsiveness to unemployment cannot be assumed to be constant along the wage distribution. In the Turkish case, we find a higher unemployment elasticity of wages around the median segment of wage distribution. This effect is more pronounced for women.     

Cyclical wage movements in emerging markets compared to developed economies: The role of interest rates

This paper documents that, at the aggregate level, (i) real wages are positively correlated with output and, on average, lag output by about one quarter in emerging markets, while there are no systematic patterns in developed economies, and (ii) real wage volatility (relative to output volatility) is about twice as high in emerging markets compared with developed economies. We then present a small open economy model with productivity shocks and countercyclical interest rates. The model incorporates a working capital requirement and the Jaimovich and Rebelo (2009) preference that allows for flexible parameterization of the strength of income effects on labor supply. The model can account for the high volatility of wage and consumption relative to output and countercyclical trade balances that characterize emerging-market economies. During economic downturns, rising interest rates in emerging markets induce relatively large income effects on labor supply, so households would not reduce their labor input as much even though wages drop significantly.     

Countercyclical or procyclical real wages? A disaggregate explanation of aggregate asymmetry

The time-series analysis of disaggregated data for a sample of 28 private industries verifies the prevalence and sources of asymmetry in aggregate data. The evidence indicates that asymmetry in the cyclical behavior of the real wage is widespread across the U.S. economy. The reduction in the real wage during recessions appears pronouncedly larger compared to the increase in the real wage during expansions in many industries. Across industries, price inflation increases faster compared to nominal wage inflation in the face of higher demand variability. Price flexibility moderates the increase in the real wage and output growth during expansions. In contrast, prices appear more downwardly rigid compared to the nominal wage in the face of demand variability. Price rigidity exacerbates the reduction in the real wage and output contraction during recessions. The combined evidence supports the implications of the sticky-price explanation of business cycles.First version received: June 2003/Final version received: June 2004The author thanks an anonymous referee for helpful comments on an earlier draft of the paper. The views expressed in this paper are those of the author and should not be interpreted as those of the International Monetary Fund.     

New Keynesian Versus New Classical Theories of Aggregate Supply: Evidence from the Oecd Countries

Using annual and quarterly data for the OECD countries this paper tests four theories of aggregate supply, namely the sticky wage, the sticky price, the worker misperception and the producer misinformation models. The empirical estimates suggest that the short run aggregate supply curve is positively sloped as a result of price and wage stickiness. Furthermore, the slope of the aggregate supply curve is found to be a positive function of the rate of inflation which is consistent with the sticky price model.     

Joint outputs and real wage rates

The magnification effect in standard international trade theory asserts that if the relative price of the labor-intensive commodity increases, the real wage will also increase, as will the wage/rental ratio. This result depends upon the assumption that both activities are nonjoint—each combining labor and capital to produce a single output, so that if activities are joint instead, the results are in jeopardy. It is shown that if the difference between the share of commodity one produced in the first activity and in the second activity exceeds the difference between the labor distributive shares in the first activity and the second, an increase in commodity 1's relative price raises the wage/rental ratio. The real wage unambiguously rises in this case if and only if the ratio of the commodity output shares in the two activities exceeds the ratio of labor shares.     

Editorial announcement

In this paper we develop a general equilibrium model of the Mexican economy in which unemployment and government deficits play important roles. The unemployment rate depends on a downwardly rigid real wage in the urban sector. The government runs a deficit simply by selling bonds that consumers consider perfect substitutes for physical capital as savings instruments. The model is used to analyze the impact of the 1980 fiscal reform. The presence of the rigid real wage and alternative specifications of government policies regarding the size of the deficit are found to have significant effects on the comparative statics results. Whether or not the reform improves the welfare of rural households compared to urban households, for example, depends on whether government policy is to keep the deficit constant or keep expenditures constant in response to changes in tax revenues.