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Fixing the Phillips Curve: Implications of Firms' Monopsonistic Wage-setting for Inflation Dynamics

Author

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  • Takushi Kurozumi
  • Willem Van Zandweghe

Abstract

Motivated by evidence documented in labor economics, we introduce firms' monopsonistic wage-setting in an otherwise standard DSGE model. Our model identifies shocks to the wage markdown as labor demand shocks—a feature absent from standard models. With both labor demand and supply shocks, our model empirically outperforms its standard counterpart model. Firms' monopsonistic wage-setting allows real unit labor cost to be decomposed into not only real marginal cost but also the wage markdown. This refined measure of real marginal cost enhances the Phillips curve's ability to describe inflation dynamics while obviating the need for price markup shocks.

Suggested Citation

  • Takushi Kurozumi & Willem Van Zandweghe, 2026. "Fixing the Phillips Curve: Implications of Firms' Monopsonistic Wage-setting for Inflation Dynamics," Working Papers 26-10, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:103287
    DOI: 10.26509/frbc-wp-202610
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    References listed on IDEAS

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    1. José Azar & Ioana Marinescu, 2024. "Monopsony Power in the Labor Market: From Theory to Policy," Annual Review of Economics, Annual Reviews, vol. 16(1), pages 491-518, August.
    2. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
    3. J. B. Taylor & M. Woodford (ed.), 1999. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 1, number 1.
    4. Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2012. "Reset Price Inflation and the Impact of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 102(6), pages 2798-2825, October.
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    Keywords

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    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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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