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How Sticky Wages In Existing Jobs Can Affect Hiring

Listed author(s):
  • Mark Bils

    (University of Rochester)

  • Yongsung Chang

    (University of Rochester)

  • Sun-Bin Kim

    (Yonsei University)

We consider a matching model of employment with flexible wages for new hires, but sticky wages within matches. Unlike most models of sticky wages, we allow effort to re- spond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort's response can greatly increase wage inertia and the volatility of employment relative to that in measured productivity.

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_579.pdf
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Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 579.

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Length: 24 pages
Date of creation: Jan 2014
Handle: RePEc:roc:rocher:579
Contact details of provider: Postal:
University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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