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Wage rigidity and destabilizing spirals

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  • Jung, Euiyoung

Abstract

This paper investigates the impact of real wage rigidity on the (de)stabilizing role of demand feedback. I show that destabilizing supply–demand feedback driven by countercyclical precautionary savings demand against uninsured unemployment risk is fundamentally a matter of rigid real wage adjustments over business cycles. Given the estimated wage rigidity consistent with aggregate labor market dynamics in the United States, the quantitative results suggest that the unemployment risk channel has a minor impact on aggregate volatility.

Suggested Citation

  • Jung, Euiyoung, 2023. "Wage rigidity and destabilizing spirals," Journal of Macroeconomics, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:jmacro:v:77:y:2023:i:c:s0164070423000460
    DOI: 10.1016/j.jmacro.2023.103546
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    More about this item

    Keywords

    New Keynesian; Labor market; Uncertainty; Unemployment; Incomplete markets;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E29 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Other
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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