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  4. March 2023
  5. Macroeconomic Dynamics with Rigid Wage Contracts

Macroeconomic Dynamics with Rigid Wage Contracts

  • Tobias Broer
  • Karl Harmenberg
  • Per Krusell
  • Erik Öberg
American Economic Review: Insights
vol. 5, no. 1, March 2023
(pp. 55-72)
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Abstract

We adapt the wage contracting structure in Chari (1983) to a dynamic, balanced-growth setting with recontracting as in Calvo (1983). The resulting wage-rigidity framework dampens income effects in the short run, thus allowing significant responses of hours to aggregate shocks. In reduced form, the model dynamics are similar to that in Jaimovich and Rebelo (2009), with their habit parameter replaced by our probability of wage-contract resetting. That is, if wage contracts are reset frequently, labor supply behaves in accordance with King, Plosser, and Rebelo (1988) preferences, whereas if they are never reset, we obtain the setting in Greenwood, Hercowitz, and Huffman (1988).

Citation

Broer, Tobias, Karl Harmenberg, Per Krusell, and Erik Öberg. 2023. "Macroeconomic Dynamics with Rigid Wage Contracts." American Economic Review: Insights, 5 (1): 55-72. DOI: 10.1257/aeri.20210672

Additional Materials

JEL Classification

  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • J22 Time Allocation and Labor Supply
  • J23 Labor Demand
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • J31 Wage Level and Structure; Wage Differentials
  • J41 Labor Contracts