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Cyclical Movements in Wages and Consumption in a Bargaining Model of Unemployment

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  • Julio J. Rotemberg

Abstract

This paper considers a model where individual workers bargain with firms over their wages and where their bargaining power is so strong that some workers are unemployed. The result is that an increase in the elasticity of demand facing individual firms raises employment (as in the case where the labor market clears) but that wages rise only modestly. In fact, consistent with the findings of Wilson (1997), some job-specific wages actually fall. Nonetheless, average wages may rise either because wages of non-rationed workers rise or because there is cyclical upgrading of jobs. Assuming that workers are also rationed in financial markets, the increase in employment that accompanies the increase in the demand elasticity for individual products also increases consumption substantially. Thus, the model rationalizes the finding that real wages rise less in booms than does consumption. At the same time, the model is consistent with a lack of secular movements in hours and unemployment as well as a secular proportionality of consumption and real wages.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6445.

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Date of creation: Mar 1998
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Handle: RePEc:nbr:nberwo:6445

Note: EFG LS ME
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  1. Dale T. Mortensen, 1979. "The Matching Process as a Non-Cooperative/Bargaining Game," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 384, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report, Federal Reserve Bank of Minneapolis 227, Federal Reserve Bank of Minneapolis.
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  5. Gary Solon & Robert Barsky & Jonathan A. Parker, 1992. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias," NBER Working Papers 4202, National Bureau of Economic Research, Inc.
  6. Miles S. Kimball, 1989. "Labor Market Dynamics When Unemployment Is A Worker Discipline Device," NBER Working Papers 2967, National Bureau of Economic Research, Inc.
  7. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, American Economic Association, vol. 71(5), pages 896-908, December.
  8. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
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  10. Ricardo J. Caballero & Mohamad L. Hammour, 1996. "The Macroeconomics of Specificity," NBER Working Papers 5757, National Bureau of Economic Research, Inc.
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  16. Gary Solon & Warren Whatley & Ann Huff Stevens, 1997. "Wage changes and intrafirm job mobility over the business cycle: Two case studies," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 50(3), pages 402-415, April.
  17. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 195-222, March.
  18. Gibbons, Robert & Katz, Lawrence F, 1992. "Does Unmeasured Ability Explain Inter-industry Wage Differentials?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(3), pages 515-35, July.
  19. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 33(3), pages 1215-1264, September.
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Cited by:
  1. E. Galdon-Sanchez, Jose & Guell, Maia, 2003. "Dismissal conflicts and unemployment," European Economic Review, Elsevier, Elsevier, vol. 47(2), pages 323-335, April.
  2. Rotemberg, Julio J., 2006. "Cyclical Wages in a Search-and-Bargaining Model with Large Firms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5791, C.E.P.R. Discussion Papers.

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