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Sticky Consumption and Rigid Wages

In: Market Behaviour and Macroeconomic Modelling

Author

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  • Tore Ellingsen
  • Steinar Holden

Abstract

A common explanation for the rise in European unemployment in the 1970s and early 80s has been based on the increase in import prices due to the oil and commodity price shocks.1 If workers resist the negative impact on the real wage, an import price shock will cause a rise in unemployment. In their influential book on unemployment, Layard, Nickell and Jackman (1991, p. 31) explain the existence and consequences of real wage resistance in the following way: Workers value not only the level of their real consumption wage, but also how it compares with what they expected it to be…. When external shocks like import price shocks, tax increases, or falls in productivity growth reduce the feasible growth of real consumption wages, this generates more wage pressure, which (in equilibrium) requires more unemployment to offset it.

Suggested Citation

  • Tore Ellingsen & Steinar Holden, 1998. "Sticky Consumption and Rigid Wages," Palgrave Macmillan Books, in: Steven Brakman & Hans Ees & Simon K. Kuipers (ed.), Market Behaviour and Macroeconomic Modelling, chapter 7, pages 183-200, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-26732-3_7
    DOI: 10.1007/978-1-349-26732-3_7
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    Cited by:

    1. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts, Fourth Version," PIER Working Paper Archive 07-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 09 Jul 2007.
    2. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2001. "Consumption Commitments and Preferences for Risk," PIER Working Paper Archive 04-021, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 18 May 2004.
    3. Steinar Holden & Fredrik Wulfsberg, 2007. "Are real wages rigid downwards?," Working Paper 2007/01, Norges Bank.
    4. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2008. "Consumption Commitments and Employment Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(2), pages 559-578.
    5. Holden, Steinar & Wulfsberg, Fredrik, 2009. "How strong is the macroeconomic case for downward real wage rigidity?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 605-615, May.
    6. Steinar Holden & John C. Driscoll, 2001. "A Note on Inflation Persistence," NBER Working Papers 8690, National Bureau of Economic Research, Inc.
    7. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.

    More about this item

    Keywords

    Transaction Cost; Real Wage; Marginal Utility; Labour Demand; Durable Good;
    All these keywords.

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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