Working Paper: CEPR ID: DP13263
Authors: Cynthia L. Doniger; J. David López-Salido
Abstract: We document that the past three "jobless" recoveries also featured asymmetries inlabor force participation and labor compensation, with each falling to new lows duringeach cycle. We model these asymmetries as resulting from a strategic complementarityin firms' wage setting and workers' job search strategies. Strategic complementarityresults in a continuum of possible equilibria with higher-wage equilibria welfaredominating lower-wage equilibria. Assuming that no economic agent deviates from anexisting strategy unless deviation is a unilateral best response, the model exhibits (1)periods of endogenous rigidity in wages and participation, (2) persistent changes inwages, participation, and output in response to transitory movements in labor produc-tivity, (3) sluggish recoveries including both a "jobless" phase, in which productivityrecovers while unemployment remains elevated, and a "wageless" phase, in whichemployment recovers but wages remain depressed. Calibrating the model suggests thatthe U.S. unemployment rate may need to fall to as low as 2.8 percent before laborcompensation recovers to pre-Financial Crisis levels.
Keywords: kinked labor supply; strategic complementarity; hysteresis; real rigidity; jobless recovery; monopsony
JEL Codes: D83; E24; J42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic complementarity between firms' wage setting and workers' job search strategies (J42) | higher-wage equilibria (D50) |
| higher-wage equilibria (D50) | increased participation from workers (J54) |
| increased participation from workers (J54) | higher wages offered by firms (J31) |
| wage changes (J31) | participation (D16) |
| participation (D16) | unemployment rates (J64) |
| unemployment rates (J64) | wage recovery (J38) |