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Endogenous real wage rigidity in a search frictions model

Author

Listed:
  • Christopher Martin
  • Bingsong Wang

Abstract

The existing literature often incorporates ad hoc models of exogenous real wage rigidity into search frictions models of the labour market in order to match the large volatility of unemployment observed in the data. In this paper, we develop an alternative version of the search frictions model that incorporates insights from behavioural economics. We derive a model in which endogenous real wage rigidity emerges from optimal wage-setting and show that this model can match the observed volatility of unemployment. Thus our proposed model can match the data as closely as the existing literature but without the disadvantage of assuming exogenous and ad hoc forms of real wage rigidity.

Suggested Citation

  • Christopher Martin & Bingsong Wang, 2018. "Endogenous real wage rigidity in a search frictions model," Oxford Economic Papers, Oxford University Press, vol. 70(4), pages 1016-1035.
    • Handle: RePEc:oup:oxecpp:v:70:y:2018:i:4:p:1016-1035.
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    File URL: http://hdl.handle.net/10.1093/oep/gpy023
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    Citations

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    Cited by:

    1. Ian M. McDonald, 2021. "A Keynesian model of aggregate demand in the long‐run," Metroeconomica, Wiley Blackwell, vol. 72(3), pages 442-459, July.
    2. M Alper Çenesiz & Luís Guimarães, 2022. "The cyclicality of job search effort in matching models [Labor supply in the past, present, and future: a Balan ced-Growth perspective]," Oxford Economic Papers, Oxford University Press, vol. 74(4), pages 1195-1213.
    3. Martin, Chris & Wang, Bingsong, 2018. "Unemployment Volatility in a Behavioural Search Model," The Warwick Economics Research Paper Series (TWERPS) 1179, University of Warwick, Department of Economics.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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