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Sticky Consumption and Rigid Wages

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Author Info

  • Ellingsen, Tore

    ()
    (Dept. of Economics, Stockholm School of Economics)

  • Holden, Steinar

Abstract

The paper suggests a channel through which past expectations affect current wage aspirations, leading to real wage rigidity. Expectations have a long run impact on the composition of consumption, because they determine the purchase of durables. Due to adjustment costs, moderate changes in income are absorbed by non-durable consumption only. We show that when labour demand is unexpectedly low, workers are risk seeking; they prefer a risk of becoming unemployed to a substantial reduction of the real wage. Conversely, they show moderation when labour demand is unexpectedly high.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 62.

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Length: 27 pages
Date of creation: Jul 1995
Date of revision:
Handle: RePEc:hhs:hastef:0062

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Fax: +46-(0)8-31 01 57
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Web page: http://www.hhs.se/
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Related research

Keywords: Wage rigidity; aspirations; durables;

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Cited by:
  1. Larry Samuelson & Andrew Postlewaite, 2004. "Consumption Commitments and Preferences for Risk," Econometric Society 2004 North American Winter Meetings 162, Econometric Society.
  2. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts," Levine's Bibliography 321307000000000145, UCLA Department of Economics.
  3. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts, Fourth Version," PIER Working Paper Archive 07-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 09 Jul 2007.
  4. Holden, Steinar & Wulfsberg, Fredrik, 2007. "Are real wages rigid downwards?," Memorandum 07/2007, Oslo University, Department of Economics.
  5. Steinar Holden & John C. Driscoll, 2001. "A Note on Inflation Persistence," NBER Working Papers 8690, National Bureau of Economic Research, Inc.
  6. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.

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