DP12316 Wage posting, nominal rigidity, and cyclical inefficiencies

Author(s): Axel Gottfries, Coen N Teulings
Publication Date: September 2017
Date Revised: September 2017
Keyword(s): job-to-job transitions, Nominal wage rigidity, on-the-job search
JEL(s): J31, J63, J64
Programme Areas: Labour Economics, Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12316

We consider a Burdett/Mortensen style wage posting model with aggregate shocks. We analyze the equilibrium under two alternative assumptions on wage setting in ongoing jobs: either fully flexible or downwardly rigid. In the model firms optimally pay only retention premiums. The equilibrium is characterized by a Taylor expansion. The model yields two simultaneous relations for wages and quits, of which the parameters are simple functions of three empirically observable arrival rates of: (i) jobs, (ii) lay offs, and (iii) aggregate shocks. Hence, there are overidentifying restrictions, which are supported remarkably well by the data. We find strong evidence for wage downward rigidity and inefficiently low job-to-job transitions during the downturn. Furthermore, we find evidence that firms pay only retention premiums, not hiring premiums. A model with wage rigidity in ongoing jobs and OJS is therefore a useful benchmark for a wage equation in macro models. Under rigidity, job-to-job transitions are in efficiently low during the downturn.