Wage Determination and Labor Market Volatility under Mismatch
Shimer (2007, American Economic Review) introduced a model of mismatch, in which limited mobility of vacant jobs and unemployed workers provides a microfoundation for their coexistence in equilibrium. Shimer assumed that the short side of a local labor market receives all the gains from trade, and argues that the model helps to explain the volatility of unemployment and the vacancy-unemployment ratio in response to productivity shocks. I show that the assumption on wages is essential for this conclusion by considering alternative assumptions. When wages are determined according to the Shapley value, they depend more smoothly on local labor market conditions, but unemployment and the vacancy-unemployment ratio are even more volatile. However, in both cases amplification relative to the Mortensen-Pissarides benchmark arises only because the implied process for wages is more volatile.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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- Blanchard, Olivier J & Galí, Jordi, 2008.
"Labour Markets and Monetary Policy: A New Keynesian Model with Unemployment,"
CEPR Discussion Papers
6765, C.E.P.R. Discussion Papers.
- Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
- Olivier Blanchard & Jordi Gali, 2008. "Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment," NBER Working Papers 13897, National Bureau of Economic Research, Inc.
- Olivier Blanchard & Jordi Galí, 2006. "Labor markets and monetary policy: A new-Keynesian model with unemployement," Economics Working Papers 1076, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2008.
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