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Endogenous Separations, Wage Rigidities and Unemployment Volatility

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Abstract

We show that in microdata, as well as in a search and matching model with flexible wages for new hires, wage rigidities of incumbent workers have substantial effects on separations and unemployment volatility. Allowing for an empirically relevant degree of wage rigidities for incumbent workers drives unemployment volatility, as well as the volatility of vacancies and tightness to that in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes. This finding affects the interpretation of a large empirical literature on wage rigidities.

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  • Carlsson, Mikael & Westermark, Andreas, 2018. "Endogenous Separations, Wage Rigidities and Unemployment Volatility," Working Paper Series 2018:5, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  • Handle: RePEc:hhs:ifauwp:2018_005
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    Cited by:

    1. Häkkinen Skans, Iida & Carlsson, Mikael & Nordström Skans, Oskar, 2017. "Wage Flexibility in a Unionized Economy with Stable Wage Dispersion," Working Papers 149, National Institute of Economic Research.

    More about this item

    Keywords

    Search and matching; Unemployment volatility puzzle; Wage rigidities; Job Destruction;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • 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

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