I propose a new mechanism for sluggish wages based on workers' noisy information about the state of the economy. Wages do not respond immediately to a positive aggregate shock because workers do not (yet) have enough information to demand higher wages. The model is robust to two major criticisms of existing theories of sluggish wages and volatile unemployment, namely, that wages are flexible for new hires and the flow opportunity cost of employment (FOCE) is pro-cyclicality. The model generates volatility in the labor market as well as wage and FOCE elasticities with respect to productivity, consistent with the data.
"The Cyclical Behavior of Unemployment and Wages under Information Frictions."
American Economic Journal: Macroeconomics,
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Business Fluctuations; Cycles
Human Capital; Skills; Occupational Choice; Labor Productivity
Wage Level and Structure; Wage Differentials
Labor Turnover; Vacancies; Layoffs