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Strategic Wage Bargaining, Labor Market Volatility, and Persistence

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  • Matthias S. Hertweck

Abstract

This paper modifies the standard Mortensen-Pissarides job matching model in order to explain the cyclical behavior of vacancies and unemployment. The modifications include strategic wage bargaining (Hall and Milgrom, 2006) and convex labor adjustment costs. The results reveal that our model replicates the cyclical behavior of both variables remarkably well. First, we show that strategic wage bargaining increases the volatility of vacancies and unemployment enormously. Second, the introduction of convex labor adjustment costs makes both variables much more persistent. Third, our analysis indicates that both modifications are complementary in generating volatile and persistent labor market variables.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2006/42.

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Date of creation: 2006
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Handle: RePEc:eui:euiwps:eco2006/42

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Keywords: Business Cycles; Matching; Strategic Bargaining;

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Cited by:
  1. Faccini, Renato & Rosazza Bondibene, Chiara, 2012. "Labour market institutions and unemployment volatility: evidence from OECD countries," Bank of England working papers 461, Bank of England.
  2. Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2013. "Unemployment and Business Cycles," NBER Working Papers 19265, National Bureau of Economic Research, Inc.
  3. Di Pace, F. & Faccini, R., 2012. "Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 183-200.

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