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Dual Labour Markets and Menu Costs: Explaining the Cyclicality of Productivity and Wage Differentials

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  • Huw. D. Dixon
  • Claus T. Hansen
  • Henrik J. Kleven

Abstract

The conventional menu cost framework performs poorly with realistic labour supply elasticities; the menu costs required for price rigidity are very high and the welfare consequences of monetary disturbances are negligible. We show that the presence of dual labour markets greatly improves the performance of the framework both by reducing menu cost requirements and by boosting the welfare consequences. In addition, the introduction of dual labour markets provides an explanation of procyclical productivity and the shrinking of wage differentials during booms, in line with stylized facts on business cycles.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 99/1.

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Handle: RePEc:yor:yorken:99/1

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  1. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-31, June.
  2. Rotemberg, Julio J & Summers, Lawrence H, 1990. "Inflexible Prices and Procyclical Productivity," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 851-74, November.
  3. William T. Dickens & Kevin Lang, 1985. "A Test of Dual Labor Market Theory," NBER Working Papers 1314, National Bureau of Economic Research, Inc.
  4. d'ASPREMONT, C. & DOS SANTOS FERREIRA, R. & GÉRARD-VARET, L.-A., . "On the Dixit-Stiglitz model of monopolistic competition," CORE Discussion Papers RP -1211, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, EconWPA.
  6. Freeman, Richard Barry, 1984. "Longitudinal Analyses of the Effects of Trade Unions," Scholarly Articles 4631951, Harvard University Department of Economics.
  7. Laurence Ball & David Romer, 1990. "Real Rigidities and the Non-Neutrality of Money," NBER Working Papers 2476, National Bureau of Economic Research, Inc.
  8. Ball, Laurence & Romer, David, 1989. "Are Prices Too Sticky?," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 507-24, August.
  9. Mellow, Wesley S, 1981. "Unionism and Wages: A Longitudinal Analysis," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 43-52, February.
  10. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
  11. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  12. Bulow, Jeremy I & Summers, Lawrence H, 1986. "A Theory of Dual Labor Markets with Application to Industrial Policy,Discrimination, and Keynesian Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 376-414, July.
  13. Huw David Dixon & Claus Thustrup Hansen, 1997. "A Mixed Industrial Structure Magnifies the Importance of Menu Costs," Discussion Papers 97-11, University of Copenhagen. Department of Economics.
  14. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
  15. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
  16. Wunnava, Phanindra V. & Honney, John K., 1991. "The union-nonunion wage differential over the business cycle : Evidence from PSID," Economics Letters, Elsevier, vol. 37(1), pages 97-103, September.
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Cited by:
  1. Sebastian Weber, 2006. "Labor Market Structures, Trade and their Effect on Unemployment: A Theoretical Analysis and Empirical Investigation," IHEID Working Papers 22-2006, Economics Section, The Graduate Institute of International Studies.
  2. Wapler, Rüdiger, 2000. "Unions, monopolistic competition and unemployment," Tübinger Diskussionsbeiträge 180, University of Tübingen, School of Business and Economics.
  3. Wapler, Rüdiger, 2001. "Unions, efficiency wages, and unemployment," Tübinger Diskussionsbeiträge 210, University of Tübingen, School of Business and Economics.

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