Discussion Paper Details

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Title: Unemployment Fluctuations, Match Quality, and the Wage Cyclicality of New Hires

Author(s): Mark Gertler, Christopher Huckfeldt and Antonella Trigari

Publication Date: June 2016


Programme Area(s): Labour Economics and Monetary Economics and Fluctuations

Abstract: Macroeconomic models often incorporate some form of wage stickiness to help account for employment fluctuations. However, a recent literature calls into question this approach, citing evidence of new hire wage cyclicality from panel data studies as evidence for contractual wage flexibility for new hires, which is the relevant margin for employment volatility. We analyze data from the SIPP and find that the wages for new hires coming from unemployment are no more cyclical than those of existing workers, suggesting wages are sticky at the relevant margin. The new hire wage cyclicality found in earlier studies instead appears to reflect cyclical average wage gains of workers making job-to-job transitions, which we interpret as evidence of procyclical match quality for new hires from employment. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and variable match quality, and show that it can account for both the panel data evidence and aggregate labor market regularities. An additional implication of the model is that a sullying effect of recessions emerges, along the lines originally suggested by Barlevy (2002).

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Bibliographic Reference

Gertler, M, Huckfeldt, C and Trigari, A. 2016. 'Unemployment Fluctuations, Match Quality, and the Wage Cyclicality of New Hires'. London, Centre for Economic Policy Research.