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Labour force participation, wage rigidities, and inflation

Author

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  • Francesco Nucci

    () (Sapienza Universita' di Roma)

  • Marianna Riggi

    () (Bank of Italy)

Abstract

The fall in the US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are also shown to account for these patterns, with the participation rate being procyclical in the US since the inception of the crisis and countercyclical in the euro area. We rationalize these diverging developments by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching framework. We show that the "added worker" e¤ect might outweigh the "discouragement effect" if real wage rigidities are allowed for and/or habit in consumers.preferences is sufficiently strong. We then draw the implications of variable labor force participation for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on in.ation stemming from the lack of downward adjustment of real wages are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation associated with wage rigidities.

Suggested Citation

  • Francesco Nucci & Marianna Riggi, 2015. "Labour force participation, wage rigidities, and inflation," DSS Empirical Economics and Econometrics Working Papers Series 2015/1, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
  • Handle: RePEc:sas:wpaper:20152
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    References listed on IDEAS

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    Cited by:

    1. Marta De Philippis, 2017. "The dynamics of the Italian labour force participation rate: determinants and implications for the employment and unemployment rate," Questioni di Economia e Finanza (Occasional Papers) 396, Bank of Italy, Economic Research and International Relations Area.
    2. Bullard, James B. & Singh, Aarti, 2017. "Nominal GDP Targeting With Heterogeneous Labor Supply," Working Papers 2017-16, Federal Reserve Bank of St. Louis.
    3. Stefano Neri & Alessandro Notarpietro, 2015. "The macroeconomic effects of low and falling inflation at the zero lower bound," Temi di discussione (Economic working papers) 1040, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Labor Force Participation; Wage Rigidities; Inflation;

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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