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Downward wage rigidity and business cycle asymmetries

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  • Abbritti, Mirko
  • Fahr, Stephan

Abstract

The growth rates of wages, unemployment and output of a number of OECD countries have a strongly skewed distribution. In this paper we analyze to what extent downward wage rigidities can explain these empirical business cycle asymmetries. To this aim, we introduce asymmetric wage adjustment costs in a New-Keynesian DSGE model with search and matching frictions in the labor market. Increasing wages is less costly than cutting them. It follows that wages increase relatively fast and thus limit vacancy posting and employment creation, but they decline more slowly, leading to a strong reduction in vacancies and employment. The presence of downward wage rigidities strongly improves the fit of the model to the observed skewness of labor market variables and the relative length of expansions and contractions in the output and the employment cycles. The asymmetry also explains the differing transmission of positive and negative monetary policy shocks from wages to inflation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 7 ()
Pages: 871-886

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Handle: RePEc:eee:moneco:v:60:y:2013:i:7:p:871-886

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Labor market; Unemployment; Downward wage rigidity; Asymmetric adjustment costs; Non-linear dynamics;

References

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Cited by:
  1. S. Boragan Aruoba & Luigi Bocola & Frank Schorfheide, 2013. "Assessing DSGE model nonlinearities," Working Papers 13-47, Federal Reserve Bank of Philadelphia.

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