Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-11T15:24:33.907Z Has data issue: false hasContentIssue false
  • English
  • Français

REAL WAGE RIGIDITY, HETEROGENEITY, AND THE BUSINESS CYCLES

Published online by Cambridge University Press:  31 October 2019

Eunseong Ma
Eunseong Ma*
Affiliation:
Louisiana State University
*
Address correspondence to: Eunseong Ma, Department of Economics, Louisiana State University, 2312 Business Education Complex South, 501 South Quad Drive, Baton Rouge, LA 70803, USA. e-mail: masilver@lsu.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper investigates the quantitative implications of real wage rigidities and heterogeneity for two long-lasting puzzles in the business cycle literature: the low correlation between total hours worked and labor productivity and the large volatility of the labor wedge, defined as a gap between the marginal rate of substitution of aggregate leisure for aggregate consumption and the marginal product of aggregate labor. I shed light on these issues by extending a heterogeneous-agent model with an indivisible labor supply choice to real wage rigidities. I find that a small amount of real wage stickiness would be sufficient to resolve both anomalies when long-term wage contracts and heterogeneity are taken into account.

Keywords

Real Wage RigidityHeterogeneityLabor WedgeHours–Productivity Correlation
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1701 - 1725
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I am deeply indebted to Sarah Zubairy for her advice and suggestions. I would also like to thank the editor William A. Barnett and an anonymous referee for the insightful suggestions. For helpful comments and feedback, I wish to thank Yuzhe Zhang, Young-Geun Goh, Chen Yeh, and seminar or conference participants at Texas A&M University, the 80th Annual Meeting of the Midwest Economics Association, 2016 Spring Midwest Macro Meetings, and the 91st Annual Conference of the Western Economic Association International.

References

REFERENCES

Abbritti, M. and Weber, S. (2010) Labor Market Institutions and the Business Cycle Unemployment Rigidities vs. Real Wage Rigidities. European Central Bank, Working Paper Series: No. 1183.Google Scholar
Aiyagari, S. R. (1994) Uninsured idiosyncratic risk and aggregate saving. The Quarterly Journal of Economics 109(3), 659–684.10.2307/2118417CrossRefGoogle Scholar
Benhabib, J., Rogerson, R. and Wright, R. (1991) Homework in macroeconomics: Household production and aggregate fluctuations. Journal of Political Economy 99(6), 1166–1187.10.1086/261796CrossRefGoogle Scholar
Benigno, P. and Ricci, L. A. (2011) The inflation-output trade-off with downward wage rigidities. American Economic Review 101(4), 1436–1466.10.1257/aer.101.4.1436CrossRefGoogle Scholar
Blinder, A. S. and Mankiw, N. G. (1984) Aggregation and stabilization policy in a multi-contract economy. Journal of Monetary Economics 13(1), 67–86.10.1016/0304-3932(84)90008-4CrossRefGoogle Scholar
Castaneda, A., Diaz-Gimenez, J. and Rios-Rull, J.-V. (1998) Exploring the income distribution business cycle dynamics. Journal of Monetary Economics 42(1), 93–130.10.1016/S0304-3932(98)00015-4CrossRefGoogle Scholar
Chang, Y. and Kim, S.-B. (2006) From individual to aggregate labor supply: A quantitative analysis based on a heterogeneous agent macroeconomy. International Economic Review 47(1), 1–27.10.1111/j.1468-2354.2006.00370.xCrossRefGoogle Scholar
Chang, Y. and Kim, S.-B. (2007) Heterogeneity and aggregation: Implications for labor-market fluctuations. American Economic Review 97(5), 1939–1956.10.1257/aer.97.5.1939CrossRefGoogle Scholar
Cho, J.-O. and Cooley, T. F. (1995) The business cycle with nominal contracts. Economic Theory 6(1), 13–33.10.1007/BF01213939CrossRefGoogle Scholar
Cho, J.-O., Cooley, T. F. and Phaneuf, L. (1997) The welfare cost of nominal wage contracting. The Review of Economic Studies 64(3), 465–484.10.2307/2971724CrossRefGoogle Scholar
Cociuba, S. E., Prescott, E. C. and Ueberfeldt, A. (2009) U.S. Hours and Productivity Behavior Using CPS Hours Worked Data: 1947-III to 2009-III. mimeo.Google Scholar
Deelen, A. and Verbeek, W. (2015) Measuring Downward Nominal and Real Wage Rigidity - Why Methods Matter. CPB Netherlands Bureau for Economic Policy Analysis CPB Discussion Paper: No. 315.Google Scholar
Dickens, W. T., Goette, L., Groshen, E. L., Holden, S., Messina, J., Schweitzer, M. E., Turunen, J. and Ward, M. E. (2007) How wages change: Micro evidence from the international wage flexibility project. Journal of Economic Perspectives 21(2), 195–214.10.1257/jep.21.2.195CrossRefGoogle Scholar
Gali, J., Gertler, M. and Lopez-Salido, J. D. (2007) Markups, gaps, and the welfare costs of business fluctuations. Review of Economics and Statistics 89(1), 44–59.10.1162/rest.89.1.44CrossRefGoogle Scholar
Gali, J. and Gambetti, L. (2009) On the sources of the great moderation. American Economic Journal: Macroeconomics 1(1), 26–57.Google Scholar
Gray, J. A. (1976) Wage indexation: A macroeconomic approach. Journal of Monetary Economics 2(2), 221–235.10.1016/0304-3932(76)90034-9CrossRefGoogle Scholar
Hall, R. E. (1997) Macroeconomic fluctuations and the allocation of time. Journal of Labor Economics 15(1), S223–S250.10.1086/209862CrossRefGoogle Scholar
Hall, R. E. (2005) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95(1), 50–65.10.1257/0002828053828482CrossRefGoogle Scholar
Hansen, G. D. (1985) Indivisible labor and the business cycle. Journal of Monetary Economics 16(3), 309–327.10.1016/0304-3932(85)90039-XCrossRefGoogle Scholar
Heckman, J. (1979) Sample selection bias as a specification error. Econometrica 47(1), 153–161.10.2307/1912352CrossRefGoogle Scholar
Holden, S. and Wulfsberg, F. (2009) How strong is the macroeconomic case for downward real wage rigidity? Journal of Monetary Economics 56(4), 605–615.10.1016/j.jmoneco.2009.03.012CrossRefGoogle Scholar
Huggett, M. (1993) The risk-free rate in heterogeneous-agent incomplete-insurance economies. Journal of Economic Dynamics and Control 17(5–6), 953–969.10.1016/0165-1889(93)90024-MCrossRefGoogle Scholar
Janko, Z. (2007) Nominal wage contracts and the monetary transmission mechanism. Economic Inquiry 45(1), 121–130.10.1111/j.1465-7295.2006.00034.xCrossRefGoogle Scholar
Janko, Z. (2008) Nominal wage contracts, labor adjustment costs and the business cycle. Review of Economic Dynamics 11(2), 434–448.10.1016/j.red.2007.08.004CrossRefGoogle Scholar
Karabarbounis, L. (2014) The labor wedge: MRS vs. MPN. Review of Economic Dynamics 17(2), 206–223.10.1016/j.red.2013.07.003CrossRefGoogle Scholar
Krusell, P. and Smith, A. A. (1998) Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106(5), 867–896.10.1086/250034CrossRefGoogle Scholar
Kydland, F. E. and Prescott, E. C. (1982) Time to build and aggregate fluctuations. Econometrica 50, 1345–1379.10.2307/1913386CrossRefGoogle Scholar
Oh, J. (2014) Inequalities and business cycles in dynamic stochastic general equilibrium models. mimeo.Google Scholar
Rogerson, R. (1988) Indivisible labor, lotteries and equilibrium. Journal of Monetary Economics 21(1), 3–16.10.1016/0304-3932(88)90042-6CrossRefGoogle Scholar
Schulz, B. (2015) Wage Rigidity and Labor Market Dynamics with Sorting. Ifo Institute for Economic Research at the University of Munich Ifo Working Paper Series Ifo Working Paper: No. 199.Google Scholar
Shimer, R. (2009) Convergence in macroeconomics: The labor wedge. American Economic Journal: Macroeconomics 1(1), 280–297.Google Scholar
Takahashi, S. (2014) Heterogeneity and aggregation: Implications for labor-market fluctuations: Comment. American Economic Review 104(4), 1446–1460.10.1257/aer.104.4.1446CrossRefGoogle Scholar
Takahashi, S. (2015) Time-Varying Wage Risk, Incomplete Markets, and Business Cycles. Discussion paper no. 912, Institute of Economic Research, Kyoto University.Google Scholar
Tauchen, G. (1986) Finite state Markov-chain approximations to univariate and vector autoregressions. Economics Letters 20(2), 177–181.10.1016/0165-1765(86)90168-0CrossRefGoogle Scholar
Uhlig, H. (2007) Explaining asset prices with external habits and wage rigidities in a DSGE model. American Economic Review 97(2), 239–243.10.1257/aer.97.2.239CrossRefGoogle Scholar