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Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics

  • Arnaud Cheron

    (Universite du Maine)

  • Francois Langot

    (Universite du Maine)

This paper modifies the standard one-sector stochastic growth model in an effort to explain the observed low procyclicality of the aggregate real wage in the US. The modifications include labor market matching with Nash-bargaining of wages and preferences as introduced in the literature by Rogerson and Wright [1988]. These preferences are non-separable in consumption and leisure. They imply that in an equilibrium with effcient risk-sharing, the utility of employed agents exceeds that of unemployed agents. The simulation results suggest that our modified model overcomes one important weakness of the standard model, namely the predicted high contemporaneous correlation of the aggregate real wage with both output and labor input. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2003.11.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 7 (2004)
Issue (Month): 2 (April)
Pages: 476-493

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Handle: RePEc:red:issued:v:7:y:2004:i:2:p:476-493
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  1. Danthine, Jean-Pierre & Donaldson, John B., 1990. "Efficiency wages and the business cycle puzzle," European Economic Review, Elsevier, vol. 34(7), pages 1275-1301, November.
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  17. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  18. Fairise, Xavier & Langot, Francois, 1994. "Labor productivity and the business cycle: Can R.B.C. models be saved?," European Economic Review, Elsevier, vol. 38(8), pages 1581-1594, October.
  19. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
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