IDEAS home Printed from https://ideas.repec.org/p/eca/wpaper/2013-319747.html
   My bibliography  Save this paper

When Hosios meets Phillips: Connecting Efficiency and Stability to Demand Shocks

Author

Listed:
  • Nicolas Petrosky-Nadeau
  • Etienne Wasmer
  • Philippe Weil

Abstract

In an economy with frictional goods and labor markets there exist a price and a wage that implement the constrained efficient allocation. This price maximizes the marginal revenue of labor, balancing a price and a trading effect on firm revenue, and this wage trades off the benefits of job creation against the cost of turnover in the labor market. We show under bargaining over prices and wages that a double Hosios condition: (i) implements the constrained efficient allocation; (ii) also minimizes the elasticity of labor market tightness and job creation to a demand shock, and; (iii) that the relative response of wages to that of unemployment to changes in demand flattens as workers lose bargaining power, and it is steepest when there is efficient rent sharing in the goods market between consumers and producers, thereby relating changes in the slope of a wage Phillips curve to the constrained efficiency of allocations.

Suggested Citation

  • Nicolas Petrosky-Nadeau & Etienne Wasmer & Philippe Weil, 2021. "When Hosios meets Phillips: Connecting Efficiency and Stability to Demand Shocks," Working Papers ECARES 2021-06, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:eca:wpaper:2013/319747
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/319747/3/2021-06-PETROSKY_WASMER_WEIL-when1.pdf
    File Function: Œuvre complète ou partie de l'œuvre
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kjetil Storesletten & Jose-Victor Rios Rull & Yan Bai, 2011. "Demand Shocks that Look Like Productivity Shocks," 2011 Meeting Papers 99, Society for Economic Dynamics.
    2. Matthias Kehrig & Nicolas Vincent, 2021. "The Micro-Level Anatomy of the Labor Share Decline," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 1031-1087.
    3. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    4. Lehmann, Etienne & Van Der Linden, Bruno, 2010. "Search Frictions On Product And Labor Markets: Money In The Matching Function," Macroeconomic Dynamics, Cambridge University Press, vol. 14(1), pages 56-92, February.
    5. Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-398, February.
    6. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    8. Zachary Bethune & Michael Choi & Randall Wright, 2020. "Frictional Goods Markets: Theory and Applications," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(2), pages 691-720.
    9. Pascal Michaillat & Emmanuel Saez, 2022. "An economical business-cycle model [Breaking through the zero lower bound]," Oxford Economic Papers, Oxford University Press, vol. 74(2), pages 382-411.
    10. Mangin, Sephorah & Julien, Benoît, 2021. "Efficiency in search and matching models: A generalized Hosios condition," Journal of Economic Theory, Elsevier, vol. 193(C).
    11. Efraim Benmelech & Nittai K. Bergman & Hyunseob Kim, 2022. "Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?," Journal of Human Resources, University of Wisconsin Press, vol. 57(S), pages 200-250.
    12. Blanchard, Oliver & Cerutti, Eugenio & SUmmers, Lawrence, 2015. "Inflation and Activity - Two Explorations and Their Monetary Policy Implications," Working Paper Series 15-070, Harvard University, John F. Kennedy School of Government.
    13. Matthias Kehrig & Nicolas Vincent, 0. "The Micro-Level Anatomy of the Labor Share Decline," The Quarterly Journal of Economics, Oxford University Press, vol. 136(2), pages 1031-1087.
    14. Christopher J. Nekarda & Valerie A. Ramey, 2020. "The Cyclical Behavior of the Price‐Cost Markup," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 319-353, December.
    15. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    16. Olivier Blanchard, 2016. "The Phillips Curve: Back to the '60s?," American Economic Review, American Economic Association, vol. 106(5), pages 31-34, May.
    17. repec:spo:wpmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b is not listed on IDEAS
    18. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    19. Robert E. Hall, 2018. "Using Empirical Marginal Cost to Measure Market Power in the US Economy," NBER Working Papers 25251, National Bureau of Economic Research, Inc.
    20. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 279-298.
    21. repec:hal:spmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Krolikowski, Pawel M. & McCallum, Andrew H., 2021. "Goods-market frictions and international trade," Journal of International Economics, Elsevier, vol. 129(C).
    2. Siena Daniele & Zago Riccardo, 2021. "Job Polarization and the Flattening of the Price Phillips Curve," Working papers 819, Banque de France.
    3. Mangin, Sephorah & Julien, Benoît, 2021. "Efficiency in search and matching models: A generalized Hosios condition," Journal of Economic Theory, Elsevier, vol. 193(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    2. repec:hal:spmain:info:hdl:2441/7c8vm7kbos9f08oo90oq51cqrp is not listed on IDEAS
    3. Thomas Brzustowski & Nicolas Petrosky-Nadeau & Etienne Wasmer, 2015. "Disentangling goods, labor and credit market frictions in three European economies," SciencePo Working papers hal-03393222, HAL.
    4. Brzustowski, Thomas & Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2018. "Disentangling goods, labor, and credit market frictions in three European economies," Labour Economics, Elsevier, vol. 50(C), pages 180-196.
    5. repec:spo:wpmain:info:hdl:2441/7c8vm7kbos9f08oo90oq51cqrp is not listed on IDEAS
    6. Thomas Brzustowski & Nicolas Petrosky-Nadeau & Etienne Wasmer, 2016. "Disentangling Goods, Labor, and Credit Market Frictions in Three European Economies," SciencePo Working papers hal-03567961, HAL.
    7. Pascal Michaillat & Emmanuel Saez, 2015. "Aggregate Demand, Idle Time, and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(2), pages 507-569.
    8. Nicolas Petrosky-Nadeau & Etienne Wasmer, 2015. "Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions," SciencePo Working papers hal-03392977, HAL.
    9. repec:hal:spmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b is not listed on IDEAS
    10. repec:spo:wpmain:info:hdl:2441/798de2mkg4999avs5b2puc2h91 is not listed on IDEAS
    11. repec:spo:wpmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b is not listed on IDEAS
    12. Nicolas Petrovsky-Nadeau & Etienne Wasmer, 2011. "Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions," SciencePo Working papers hal-00972918, HAL.
    13. repec:hal:spmain:info:hdl:2441/798de2mkg4999avs5b2puc2h91 is not listed on IDEAS
    14. Krolikowski, Pawel M. & McCallum, Andrew H., 2021. "Goods-market frictions and international trade," Journal of International Economics, Elsevier, vol. 129(C).
    15. Rabinovich, Stanislav & Wolthoff, Ronald, 2022. "Misallocation inefficiency in partially directed search," Journal of Economic Theory, Elsevier, vol. 206(C).
    16. Masters, Adrian, 2011. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1017-1031, July.
    17. Juan C. Córdoba & Anni T. Isojärvi & Haoran Li, 2023. "Endogenous Bargaining Power and Declining Labor Compensation Share," Finance and Economics Discussion Series 2023-030, Board of Governors of the Federal Reserve System (U.S.).
    18. Maciej K. Dudek & ówna Handlowa, 2006. "On Artificial Structural Unemployment," Computing in Economics and Finance 2006 171, Society for Computational Economics.
    19. Gabrovski, Miroslav & Geromichalos, Athanasios & Herrenbrueck, Lucas & Kospentaris, Ioannis & Lee, Sukjoon, 2025. "The real effects of financial disruptions in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 151(C).
    20. Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-398, February.
    21. Hall, R.E., 2016. "Macroeconomics of Persistent Slumps," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2131-2181, Elsevier.
    22. Nicolas Petrosky-Nadeau & Etienne Wasmer, 2016. "The efficiency of surplus sharing," 2016 Meeting Papers 1318, Society for Economic Dynamics.
    23. Griffy, Benjamin & Masters, Adrian, 2022. "Labor market policy in the presence of a participation externality," European Economic Review, Elsevier, vol. 144(C).
    24. Miroslav Gabrovski & Athanasios Geromichalos & Lucas Herrenbrueck & Ioannis Kospentaris & Sukjoon Lee, 2025. "How does asset market liquidity affect the real economy? A quantitative assessment of the transmission channels," Working Papers 202501, University of Hawaii at Manoa, Department of Economics.
    25. Mangin, Sephorah & Julien, Benoît, 2021. "Efficiency in search and matching models: A generalized Hosios condition," Journal of Economic Theory, Elsevier, vol. 193(C).
    26. Aguiar-Conraria, Luís & Martins, Manuel M.F. & Soares, Maria Joana, 2023. "The Phillips curve at 65: Time for time and frequency," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).

    More about this item

    Keywords

    Aggregate demand; unemployment; search and matching frictions; market power; constrained efficiency; wage Phillips curve;
    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
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eca:wpaper:2013/319747. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Benoit Pauwels (email available below). General contact details of provider: https://edirc.repec.org/data/arulbbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.