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Search Theory, Downward Money Wage Rigidity and the Micro Foundations of the Phillips Curve

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  • Schager, Nils Henrik

    (Research Institute of Industrial Economics (IFN))

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    Abstract

    The present paper has two aims. The first one concerns primarily an issue of method. I set up and analyse an explicitly stochastic model of the optimal behaviour of a firm, which recruits from a search labour market. The second aim of my paper concerns very much an issue of substance in economics. I show that when the firm is not allowed to decrease its money wage, its optimal response to lower unemployment is to increase its wage, if a plausible (and testable) condition with regard to its expected horizon is met. Hence search theory predicts the existence of a micro Phillips relation under plausible assumptions.

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    File URL: http://www.ifn.se/wfiles/wp/wp200.pdf
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    Bibliographic Info

    Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 200.

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    Length: 26 pages
    Date of creation: Dec 1988
    Date of revision:
    Handle: RePEc:hhs:iuiwop:0200

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    Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
    Phone: +46 8 665 4500
    Fax: +46 8 665 4599
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    Web page: http://www.ifn.se/
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    Related research

    Keywords: Wage rigidity; job search; phillips curve; optimal firm behaviour;

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    References

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    1. Eaton, B Curtis & Watts, Martin, 1977. "Wage Dispersion, Job Vacancies and Job Search in Equilibrium," Economica, London School of Economics and Political Science, vol. 44(173), pages 23-35, February.
    2. Leban, Raymond, 1982. "Employment and wage strategies of the firm over a business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 371-394, November.
    3. Zuckerman, Dror, 1988. "Job search with general stochastic offer arrival rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(4), pages 679-684, November.
    4. Salop, S. C., 1973. "Wage differentials in a dynamic theory of the firm," Journal of Economic Theory, Elsevier, vol. 6(4), pages 321-344, August.
    5. Lippman, Steven A, 1980. "Optimal Pricing to Retard Entry," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 723-31, July.
    6. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
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