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The high sensitivity of employment to agency costs: The relevance of wage rigidity

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  • Hristov, Atanas

Abstract

The paper studies the interaction between financing constraints and labor market imperfections and the role of this interaction on labor market dynamics. In the model economy, a positive productivity shock is amplified through endogenous fluctuations in the financial market. The paper shows that if wages are set via Nash bargaining, the productivity shock substantially increases wage volatility and, as a result, the shock has very little effect on firm profitability and hiring workers over the business cycle. When the model includes wage rigidities, however, firms’ profitability becomes highly responsive to productivity changes: the financial accelerator mechanism induces additional fluctuations in labor market quantities, as observed in the data.

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  • Hristov, Atanas, 2015. "The high sensitivity of employment to agency costs: The relevance of wage rigidity," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 137-154.
  • Handle: RePEc:eee:jmacro:v:45:y:2015:i:c:p:137-154
    DOI: 10.1016/j.jmacro.2015.04.007
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    More about this item

    Keywords

    Credit and search frictions; Labor market; Unemployment;
    All these keywords.

    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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