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Labour Market Search, Wage Bargaining and Inflation Dynamics

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  • Antonella Trigari

Abstract

This paper integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The model is used to study the dynamic response of the economy to a monetary policy shock. The labor market displays search and matching frictions and bargaining over real wages and hours of work. Search frictions generate unemployment in equilibrium. Wage bargaining introduces a microfounded real wage rigidity. First, I study a Nash bargaining model. Then, I develop an alternative bargaining model, which I refer to as right-to-manage bargaining. Both models have similar predictions in terms of real wage dynamics: bargaining significantly reduces the volatility of the real wage. But they have different implications for inflation dynamics: under right-to-manage, the real wage rigidity also results in smaller fluctuations of inflation. These findings are consistent with recent evidence suggesting that real wages and inflation only vary by a moderate amount in response to a monetary shock. Finally, the model can explain important features of labor-market fluctuations. In particular, a monetary expansion leads to a rise in job creation and to a hump-shaped decline in unemployment.

Suggested Citation

  • Antonella Trigari, 2004. "Labour Market Search, Wage Bargaining and Inflation Dynamics," Working Papers 268, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:268
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    References listed on IDEAS

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    Cited by:

    1. Abbritti, Mirko & Boitani, Andrea & Damiani, Mirella, 2006. "Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs," MPRA Paper 2252, University Library of Munich, Germany, revised Jan 2007.
    2. J. Boscá & A. Díaz & R. Doménech & J. Ferri & E. Pérez & L. Puch, 2010. "A rational expectations model for simulation and policy evaluation of the Spanish economy," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(1), pages 135-169, March.
    3. Fabio Rumler & Johann Scharler, 2011. "Labor Market Institutions And Macroeconomic Volatility In A Panel Of Oecd Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(3), pages 396-413, July.
    4. George A. Slotsve & James M. Nason, 2003. "Along the New Keynesian Phillips Curve with Nominal and Real Rigidities," Computing in Economics and Finance 2003 270, Society for Computational Economics.
    5. Raquel Fonseca & Lise Patureau & Thepthida Sopraseuth, 2009. "Divergence in Labor Market Institutions and International Business Cycles," Annals of Economics and Statistics, GENES, pages 279-314.
    6. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Barnichon, Regis, 2007. "Productivity, aggregate demand and unemployment fluctuations," LSE Research Online Documents on Economics 19694, London School of Economics and Political Science, LSE Library.
    8. Christoffel, Kai & Linzert, Tobias, 2005. "The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics," IZA Discussion Papers 1896, Institute for the Study of Labor (IZA).
    9. Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," IHEID Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008.
    10. Christoffel, Kai & Linzert, Tobias, 2005. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Working Paper Series 556, European Central Bank.
    11. Mirko Abbritti, 2007. "A "Simple" Currency Union Model with Labor Market Frictions, Real Wage Rigidities and Equilibrium Unemployment," IHEID Working Papers 09-2007, Economics Section, The Graduate Institute of International Studies.
    12. Mirko Abbritti & Andrea Boitani & Mirella Damiani, 2012. "Labour Market Imperfections, "Divine Coincidence" and Volatility of Employment and Inflation," Review of Economics and Institutions, Università di Perugia, vol. 3(1).

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