DP16764 Macroeconomic Dynamics with Rigid Wage Contracts

Author(s): Tobias Broer, Karl Harmenberg, Per Krusell, Erik Öberg
Publication Date: December 2021
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Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16764

We adapt the wage contracting structure in Chari (1983) to a dynamic, balanced-growth setting with re-contracting à la Calvo (1983). The resulting wage-rigidity framework delivers a model very similar to that in Jaimovich and Rebelo (2009), with their habit parameter replaced by our probability of wage-contract resetting. That is, if wage contracts can be reset very frequently, labor supply behaves in accordance with King et al. (1988) preferences, whereas if they are sticky for a long time, we obtain the setting in Greenwood et al. (1988), thus allowing significant responses of hours to wage changes.