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Growth, Unemployment and Wage Inertia

  • Xavier Raurich
  • Valeri Sorolla

We introduce wage setting via efficiency wages in the neoclassical one-sector growth model to study the growth effects of wage inertia. We compare the dynamic equilibrium of an economy with wage inertia with the equilibrium of an economy without it. We show that wage inertia affects the long run employment rate and that the transitional dynamics of the main economic variables will be different because wages are a state variable when wage inertia is introduced. In particular, we show that the model with wage inertia can explain some growth patterns that cannot be explained when wages are flexible. We also study the growth effects of permanent technological and fiscal policy shocks in these two economies. During the transition, the growth effects of technological shocks obtained when wages exhibit inertia may be the opposite of those obtained when wages are flexible. These technological shocks may have long run effects if there is wage inertia.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c017_029.

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Length: 39 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:deg:conpap:c017_029
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