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Heterogeneous Downward Nominal Wage Rigidity: Foundations of a Nonlinear Phillips Curve

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  • Stephanie Schmitt-Grohé
  • Martín Uribe

Abstract

We propose a model with heterogeneous downward nominal wage rigidity for individual labor varieties. The model delivers a nonlinear wage Phillips curve linking current wage inflation with current unemployment that is relatively steep at high levels of inflation and flat at low levels of inflation. The predicted nonlinear Phillips curve matches well the pattern of wage inflation and unemployment observed in the United States over the past 40 years. In particular, it accounts for the resilience of the labor market in the tightening cycle following the Covid-19 inflation spike and for the missing inflation in the recovery from the 2008 great contraction. Finally, although the model features occasionally binding constraints for individual labor types, there are no such constraints in the aggregate, making the model amenable to perturbation analysis.

Suggested Citation

  • Stephanie Schmitt-Grohé & Martín Uribe, 2022. "Heterogeneous Downward Nominal Wage Rigidity: Foundations of a Nonlinear Phillips Curve," NBER Working Papers 30774, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30774
    Note: EFG IFM ME
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    Cited by:

    1. Ferri, Piero & Cristini, Annalisa & Tramontana, Fabio, 2023. "Meta-models of the Phillips curve and income distribution," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 215-232.
    2. Gerke, Rafael & Giesen, Sebastian & Lozej, Matija & Röttger, Joost, 2024. "On household labour supply in sticky-wage HANK models," Discussion Papers 01/2024, Deutsche Bundesbank.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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