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Wage Rigidity and Job Creation

  • Haefke, Christian

    ()

    (New York University, Abu Dhabi)

  • Sonntag, Marcus

    ()

    (University of Bonn)

  • van Rens, Thijs

    ()

    (University of Warwick)

Standard macroeconomic models underpredict the volatility of unemployment fluctuations. A common solution is to assume wages are rigid. We explore whether this explanation is consistent with the data. We show that the wage of newly hired workers, unlike the aggregate wage, is volatile and responds one-to-one to changes in labor productivity. In order to replicate these findings in a search model, it must be that wages are rigid in ongoing jobs but flexible at the start of new jobs. This form of wage rigidity does not affect job creation and thus cannot explain the unemployment volatility puzzle.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3714.

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Length: 43 pages
Date of creation: 2008/09
Publication status: published in: Journal of Monetary Economics, 2013, 60, 887 - 899.
Handle: RePEc:iza:izadps:dp3714
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