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Strategic Wage Bargaining, Labor Market Volatility, and Persistence

  • Matthias S. Hertweck


    (Department of Economics, University of Konstanz, Germany)

This paper modifies the standard Mortensen-Pissarides model in order to explain the cyclical behavior of vacancies and unemployment. The modifications include strategic wage bargaining and convex labor adjustment costs. We find that this setup replicates the cyclical behavior of both labor market variables remarkably well. First, we show that the model with strategic wage bargaining matches closely the volatility of vacancies and unemployment. Second, the introduction of convex labor adjustment costs makes both variables much more persistent. Third, our analysis indicates that these two modifications are complementary in generating labor market volatility and persistence.

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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2011-26.

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Length: 42 pages
Date of creation: 15 Jul 2011
Date of revision:
Handle: RePEc:knz:dpteco:1126
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  1. Yashiv, Eran, 2006. "Evaluating the performance of the search and matching model," European Economic Review, Elsevier, vol. 50(4), pages 909-936, May.
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  4. Merz, Monika & Yashiv, Eran, 2003. "Labor and the Market Value of the Firm," IZA Discussion Papers 965, Institute for the Study of Labor (IZA).
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  8. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 19-50.
  9. Robert G. King & Julia K. Thomas, 2004. "Partial adjustment without apology," Staff Report 327, Federal Reserve Bank of Minneapolis.
  10. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  11. Knabe, Andreas, 2009. "Implementing endogenous inside options in Nash wage bargaining models," Mathematical Social Sciences, Elsevier, vol. 57(2), pages 161-176, March.
  12. Helge Braun & Reinout De Bock & Riccardo DiCecio, 2009. "Supply shocks, demand shocks, and labor market fluctuations," Review, Federal Reserve Bank of St. Louis, issue May, pages 155-178.
  13. Malcomson, James M., 1999. "Individual employment contracts," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 35, pages 2291-2372 Elsevier.
  14. Shigeru Fujita & Garey Ramey, 2005. "The dynamic Beveridge curve," Working Papers 05-22, Federal Reserve Bank of Philadelphia.
  15. Nilsen, Øivind Anti & Salvanes, Kjell G. & Schiantarelli, Fabio, 2003. "Employment Changes, the Structure of Adjustment Costs, and Plant Size," Working Papers in Economics 11/03, University of Bergen, Department of Economics.
  16. Hamermesh, Daniel S. & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers 1371, C.E.P.R. Discussion Papers.
  17. van Ours, Jan & Ridder, Geert, 1992. "Vacancies and the Recruitment of New Employees," Journal of Labor Economics, University of Chicago Press, vol. 10(2), pages 138-55, April.
  18. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  19. Morten O. Ravn & Saverio Simonelli, 2007. "Labor Market Dynamics and the Business Cycle: Structural Evidence for the United States," CSEF Working Papers 182, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  20. Shigeru Fugita & Garey Ramey, 2006. "Job matching and propagation," Working Papers 06-13, Federal Reserve Bank of Philadelphia.
  21. Stephen R. G. Jones & W. Craig Riddell, 1999. "The Measurement of Unemployment: An Empirical Approach," Econometrica, Econometric Society, vol. 67(1), pages 147-162, January.
  22. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  23. Blundell, Richard & Meghir, Costas & Symons, Elizabeth & Walker, Ian, 1988. "Labour supply specification and the evaluation of tax reforms," Journal of Public Economics, Elsevier, vol. 36(1), pages 23-52, June.
  24. Arnaud Cheron & Francois Langot, 2004. "Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 476-493, April.
  25. Barron, John M & Gilley, Otis W, 1981. "Job Search and Vacancy Contacts: Note," American Economic Review, American Economic Association, vol. 71(4), pages 747-52, September.
  26. van Ours, J.C. & Ridder, G., 1992. "Vacancies and recruitment of new employees," Other publications TiSEM 9acc708a-0885-46a2-aef5-7, Tilburg University, School of Economics and Management.
  27. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
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