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Strategic Wage Bargaining, Labor Market Volatility, and Persistence

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Author Info
Matthias S. Hertweck

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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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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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Related research
Keywords: Business Cycles; Matching; Strategic Bargaining;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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