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Dual Labour Markets and Menu Costs: Explaining the Cyclicality of Productivity and Wage Differentials

Author

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  • Huw David Dixon
  • Claus Thustrup Hansen
  • Henrik J. Kleven

Abstract

The conventional menu cost framework performs poorly with realistic labour supply elasticities; the menu costs required for price rigidity are very high and the welfare consequences of monetary disturbances are negligible. We show that the presence of dual labour markets greatly improves the performance of the framework both by reducing menu cost requirements and by boosting the welfare consequences. In addition, the introduction of dual labour markets provides an explanation of procyclical productivity and the shrinking of wage differentials during booms, in line with stylized facts on business cycles.

Suggested Citation

  • Huw David Dixon & Claus Thustrup Hansen & Henrik J. Kleven, "undated". "Dual Labour Markets and Menu Costs: Explaining the Cyclicality of Productivity and Wage Differentials," EPRU Working Paper Series 99-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:epruwp:99-13
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    References listed on IDEAS

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    1. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-531, June.
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    7. Laurence Ball & David Romer, 1990. "Real Rigidities and the Non-Neutrality of Money," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 183-203.
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    Cited by:

    1. Sebastian Weber, 2006. "Labor Market Structures, Trade and their Effect on Unemployment: A Theoretical Analysis and Empirical Investigation," IHEID Working Papers 22-2006, Economics Section, The Graduate Institute of International Studies.
    2. Wapler, Rüdiger, 2000. "Unions, monopolistic competition and unemployment," Tübinger Diskussionsbeiträge 180, University of Tübingen, School of Business and Economics.
    3. Wapler, Rüdiger, 2001. "Unions, efficiency wages, and unemployment," Tübinger Diskussionsbeiträge 210, University of Tübingen, School of Business and Economics.

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