The Consequences of Rigid Wages in Search Models∗
نویسنده
چکیده
The standard theory of equilibrium unemployment, the Mortensen-Pissarides search and matching model, cannot explain the magnitude of the business cycle fluctuations in two of its central elements, unemployment and vacancies. Modifying the model to make the present value of wages unresponsive to current labor market conditions amplifies fluctuations in unemployment and vacancies by an order of magnitude, significantly improving the performance of the model. Despite this, the welfare consequences of such rigid wages is negligible. JEL Classifications: E24, E32, J30, J41, J63, J64 ∗This paper was originally titled “The Cyclical Behavior of Labor Markets”. I thank seminar audiences at the European Economic Association Annual Congress in Stockholm and at the Labor Market Frictions and Macroeconomic Dynamics at Université du Québec à Montréal for useful comments, with special gratitude to Paul Beaudry and Per Krusell. This material is based upon work supported by the National Science Foundation under grant number 0079345 and by the Alfred P. Sloan Foundation. †Department of Economics, University of Chicago and NBER, email: [email protected]
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