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The Consequences of Rigid Wages in Search Models

  • Robert Shimer

    (University of Chicago and NBER,)

The standard theory of equilibrium unemployment, the Mortensen-Pissarides search and matching model, cannot explain the magnitude of the business cycle fluctuations in two of its central elements, unemployment and vacancies. Modifying the model to make the present value of wages unresponsive to current labor market conditions amplifies fluctuations in unemployment and vacancies by an order of magnitude, significantly improving the performance of the model. Despite this, the welfare consequences of such rigid wages is negligible. (JEL: E24, E32, J30, J41, J63, J64) Copyright (c) 2004 The European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 2-3 (04/05)
Pages: 469-479

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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:2-3:p:469-479
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  1. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
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