American Economic Review: Insights
ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)
Macroeconomic Dynamics with Rigid Wage Contracts
American Economic Review: Insights
vol. 5,
no. 1, March 2023
(pp. 55–72)
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.20210672Additional 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