The Cyclical Behavior of Unemployment and Wages under Information Frictions
- American Economic Journal: Macroeconomics (Forthcoming)
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
ow 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.
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