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  3. American Economic Journal: Macroeconomics
  4. January 2022
  5. The Cyclical Behavior of Unemployment and Wages under Information Frictions

The Cyclical Behavior of Unemployment and Wages under Information Frictions

  • Camilo Morales-Jiménez
American Economic Journal: Macroeconomics
vol. 14, no. 1, January 2022
(pp. 301-31)
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Abstract

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.

Citation

Morales-Jiménez, Camilo. 2022. "The Cyclical Behavior of Unemployment and Wages under Information Frictions." American Economic Journal: Macroeconomics, 14 (1): 301-31. DOI: 10.1257/mac.20180404

Additional Materials

JEL Classification

  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E32 Business Fluctuations; Cycles
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • J31 Wage Level and Structure; Wage Differentials
  • J63 Labor Turnover; Vacancies; Layoffs
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