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Cyclical Movements in Wages and Consumption in a Bargaining Model of Unemployment

  • Julio J. Rotemberg

This paper considers a model where individual workers bargain with firms over their wages and where their bargaining power is so strong that some workers are unemployed. The result is that an increase in the elasticity of demand facing individual firms raises employment (as in the case where the labor market clears) but that wages rise only modestly. In fact, consistent with the findings of Wilson (1997), some job-specific wages actually fall. Nonetheless, average wages may rise either because wages of non-rationed workers rise or because there is cyclical upgrading of jobs. Assuming that workers are also rationed in financial markets, the increase in employment that accompanies the increase in the demand elasticity for individual products also increases consumption substantially. Thus, the model rationalizes the finding that real wages rise less in booms than does consumption. At the same time, the model is consistent with a lack of secular movements in hours and unemployment as well as a secular proportionality of consumption and real wages.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6445.

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Date of creation: Mar 1998
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Handle: RePEc:nbr:nberwo:6445
Note: EFG LS ME
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  10. Solon, Gary & Barsky, Robert & Parker, Jonathan A, 1994. "Measuring the Cyclicality of Real Wages: How Important Is Composition Bias?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 1-25, February.
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  16. Shin, Donggyun, 1994. "Cyclicality of real wages among young men," Economics Letters, Elsevier, vol. 46(2), pages 137-142, October.
  17. Gibbons, Robert & Katz, Lawrence F, 1992. "Does Unmeasured Ability Explain Inter-industry Wage Differentials?," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 515-35, July.
  18. Beth Anne Wilson, 1997. "Movements of wages over the business cycle: an intra-firm view," Finance and Economics Discussion Series 1997-1, Board of Governors of the Federal Reserve System (U.S.).
  19. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, vol. 86(1), pages 195-222, March.
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  23. Bils, Mark, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 699-718, November.
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