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Wage Posting, Nominal Rigidity, and Cyclical Inefficiencies

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  • Gottfries, A.
  • Teulings, T.

Abstract

We consider a Burdett and Mortensen style wage posting model with aggregate shocks. We analyze the equilibrium under two alternative assumptions on wage setting in ongoing jobs: either fully flexible or downwardly rigid. In the model firms optimally pay only retention premiums. The equilibrium is characterized by a Taylor expansion. The model yields two simultaneous relations for wages and quits, of which the parameters are simple functions of three empirically observable arrival rates of: (i) jobs, (ii) lay offs, and (iii) aggregate shocks. Hence, there are overidentifying restrictions, which are supported remarkably well by the data. We find strong evidence for wage downward rigidity and inefficiently low job-to-job transitions during the downturn. Furthermore, we find evidence that firms pay only retention premiums, not hiring premiums. A model with wage rigidity in ongoing jobs and OJS is therefore a useful benchmark for a wage equation in macro models.

Suggested Citation

  • Gottfries, A. & Teulings, T., 2017. "Wage Posting, Nominal Rigidity, and Cyclical Inefficiencies," Cambridge Working Papers in Economics 1736, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1736
    Note: ag558, cnt23
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    References listed on IDEAS

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    More about this item

    Keywords

    Nominal wage rigidity; on-the-job search; job-to-job transitions;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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