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Sticky Consumption and Rigid Wages

Author

Listed:
  • Ellingsen, Tore

    () (Dept. of Economics, Stockholm School of Economics)

  • Holden, Steinar

Abstract

The paper suggests a channel through which past expectations affect current wage aspirations, leading to real wage rigidity. Expectations have a long run impact on the composition of consumption, because they determine the purchase of durables. Due to adjustment costs, moderate changes in income are absorbed by non-durable consumption only. We show that when labour demand is unexpectedly low, workers are risk seeking; they prefer a risk of becoming unemployed to a substantial reduction of the real wage. Conversely, they show moderation when labour demand is unexpectedly high.

Suggested Citation

  • Ellingsen, Tore & Holden, Steinar, 1995. "Sticky Consumption and Rigid Wages," SSE/EFI Working Paper Series in Economics and Finance 62, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0062
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    Cited by:

    1. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts, Fourth Version," PIER Working Paper Archive 07-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 09 Jul 2007.
    2. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2001. "Consumption Commitments and Preferences for Risk," PIER Working Paper Archive 04-021, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 18 May 2004.
    3. Steinar Holden & Fredrik Wulfsberg, 2007. "Are real wages rigid downwards?," Working Paper 2007/01, Norges Bank.
    4. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2008. "Consumption Commitments and Employment Contracts," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 559-578.
    5. Steinar Holden & John C. Driscoll, 2001. "A Note on Inflation Persistence," NBER Working Papers 8690, National Bureau of Economic Research, Inc.
    6. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.

    More about this item

    Keywords

    Wage rigidity; aspirations; durables;

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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