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Wage, inflation and employment dynamics with labour market matching

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Author Info

  • Kai Christoffel

    ()
    (European Central Bank)

  • James Costain

    ()
    (Banco de España)

  • Gregory de Walque

    ()
    (Banque Nationale de Belgique)

  • Keith Kuester

    ()
    (Federal Reserve Bank of Philadelphia)

  • Tobias Linzert

    ()
    (European Central Bank)

  • Stephen Millard

    ()
    (Bank of England)

  • Olivier Pierrard

    ()
    (Banque Centrale du Luxembourg)

Abstract

In a search and matching environment, this paper assesses a range of modeling setups against macro evidence for the monetary transmission mechanism in the euro area. In particular, we assess right-to-manage vs. efficient bargaining, flexible vs. sticky wages, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour imply a sufficient degree of real rigidity, and so can reproduce inflation dynamics well. However, they imply too small a response on the employment margin. The other model variants fit employment dynamics better, but then imply too little real rigidity and, so, too volatile inflation, owing to strong responses of marginal wages and hours per employee. Further sources of real rigidities - possibly from outside of the labour market - seem to be needed to simultaneously explain the responses of wages, inflation and employment.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/09/Fic/dt0918e.pdf
File Function: First version, August 2009
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0918.

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Length: 47 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:bde:wpaper:0918

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Related research

Keywords: Inflation Dynamics; Labour Market; Business Cycle; Real Rigidities;

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Cited by:
  1. Moon, Weh-Sol, 2011. "Business cycle with nominal contracts and search frictions," MPRA Paper 31716, University Library of Munich, Germany.

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