Working Paper: CEPR ID: DP3423
Authors: Jean-Pierre Danthine; Andre Kurmann
Abstract: We build a New Keynesian model of the business cycle with sticky prices and real wage rigidities motivated by efficiency wages of the gift exchange variety. Compared to a standard sticky price model, our Fair Wage model provides an explanation for structural employment and generates more plausible labour market dynamics, notably accounting for the low correlation between wages and employment. The fair wage induced real wage rigidity also significantly reduces the elasticity of marginal cost with respect to output. The smoother dynamics of real marginal cost increase both amplification and persistence of output responses to monetary shocks, thus remedying the well-known lack of internal propagation of standard sticky price models. We take these improvements as a strong endorsement of the addition of real wage rigidities to nominal price rigidities and conclude that the fair wage extension of this Paper constitutes a promising platform for an enriched New Keynesian synthesis.
Keywords: Business Cycles; Efficiency Wages; Persistence; Sticky Prices
JEL Codes: E24; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real wage rigidities (J31) | structural unemployment (J64) |
| real wage rigidities (J31) | elasticity of marginal cost with respect to output (D24) |
| elasticity of marginal cost with respect to output (D24) | smoother dynamics in real marginal cost (D40) |
| smoother dynamics in real marginal cost (D40) | enhanced output responses to monetary shocks (E39) |
| real wage rigidities (J31) | near-zero correlation between real wages and employment (J39) |