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Title: Wage posting, nominal rigidity, and cyclical inefficiencies

Author(s): Axel Gottfries and Coen N Teulings

Publication Date: September 2017

Keyword(s): job-to-job transitions, Nominal wage rigidity and on-the-job search

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

Abstract: 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.

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Bibliographic Reference

Gottfries, A and Teulings, C. 2017. 'Wage posting, nominal rigidity, and cyclical inefficiencies'. London, Centre for Economic Policy Research.