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Equilibrium wage rigidity in directed search

Author

Listed:
  • Gabriele Camera

    (Economic Science Institute, Chapman University and University of Bologna)

  • Jaehong Kim

    (Xiamen University)

Abstract

Matching frictions and downward wage rigidity emerge as equilibrium phenomena in a twosided labor market where firms sustain variable wage adjustment costs. Firms post wages to attract workers and matches are endogenous. Reducing the wage relative to the wage previously posted is costly to the firm, where the cost is proportional to the size of the proposed cut. Shocks to the firm’s profitability may yield an equilibrium wage above what the firm would offer absent proportional adjustment costs. Wage cuts can be partial or full, immediate or delayed, and are non-linear in the shock size. Importantly, wages are sticky even if firms have negligible costs for cutting wages.

Suggested Citation

  • Gabriele Camera & Jaehong Kim, 2018. "Equilibrium wage rigidity in directed search," Working Papers 18-04, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:18-04
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/242/
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    frictions; matching; sticky wages;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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