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Inflation dynamics with labour market matching: assessing alternative specifications

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  • Christoffel, Kai
  • Costain, James
  • de Walque, Gregory
  • Kuester, Keith
  • Linzert, Tobias
  • Millard, Stephen
  • Pierrard, Olivier

Abstract

This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates. JEL Classification: E31, E32, E24, J64

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Paper provided by European Central Bank in its series Working Paper Series with number 1053.

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Date of creation: May 2009
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Handle: RePEc:ecb:ecbwps:20091053

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Keywords: business cycle; Inflation Dynamics; labour market; real rigidities;

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