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Resuscitating the wage channel in models with unemployment fluctuations

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Author Info
Kai Christoffel () (DG-Research, European Central Bank, Kaiserstraße 29, 60311 Frankfurt am Main, Germany.)
Keith Kuester () (Monetary Policy Strategy Division, European Central Bank, Kaiserstraße 29, 60311 Frankfurt am Main, Germany.)

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Abstract

All else equal, higher wages translate into higher inflation. More rigid wages imply a weaker response of inflation to shocks. This view of the wage channel is deeply entrenched in central banks’ views and models of their economies. In this paper, we present a model with equilibrium unemployment which has three distinctive properties. First, using a search and matching model with right-to-manage wage bargaining, a proper wage channel obtains. Second, accounting for fixed costs associated with maintaining an existing job greatly magnifies profit fluctuations for any given degree of wage fluctuations, which allows the model to reproduce the fluctuations of unemployment over the business cycle. And third, the model implies a reasonable elasticity of steady state unemployment with respect to changes in benefits. The calibration of the model implies low profits, but does not require a small gap between the value of working and the value of unemployment for the worker. JEL Classification: E31, E32, E24, J64.

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Paper provided by European Central Bank in its series Working Paper Series with number 923.

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Length: 47 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:ecb:ecbwps:20080923

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Related research
Keywords: Bargaining; Unemployment; Business Cycle; Real Rigidities.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  4. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kai Christoffel & Keith Kuester, 2008. "The elasticity of the unemployment rate with respect to benefits," Working Papers 08-15, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  2. Takushi Kurozumi & Willem Van Zandweghe, 2008. "Labor market search and interest rate policy," Research Working Paper RWP 08-03, Federal Reserve Bank of Kansas City. [Downloadable!]
  3. De Walque, Gregory & Pierrard, Olivier & Sneessens, Henri & Wouters, Raf, 2009. "Sequential Bargaining in a New-Keynesian Model with Frictional Unemployment and Staggered Wage Negotiation," IZA Discussion Papers 4059, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Kai Christoffel & Keith Kuester & Tobias Linzert, 2009. "The role of labor markets for Euro area monetary policy," Working Papers 09-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  5. Tovar, Camilo Ernesto, 2009. "DSGE Models and Central Banks," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(16), pages 1-31. [Downloadable!]
    Other versions:
  6. Christoffel, Kai & Costain, James & de Walque, Gregory & Kuester, Keith & Linzert, Tobias & Millard, Stephen & Pierrard, Olivier, 2009. "Inflation dynamics with labour market matching: assessing alternative specifications," Bank of England working papers 375, Bank of England. [Downloadable!]
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  7. Christian Merkl, 2009. "The Inflation-Output Tradeoff: Which Type of Labor Market Rigidity Is to Be Blamed?," Kiel Working Papers 1495, Kiel Institute for the World Economy. [Downloadable!]
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