Working Paper: NBER ID: w12415
Authors: Julio J. Rotemberg
Abstract: This paper presents a complete general equilibrium model with flexible wages where the degree to which wages and productivity change when cyclical employment changes is roughly consistent with postwar U.S. data. Firms with market power are assumed to bargain simultaneously with many employees, each of whom finds himself matched with a firm only after a process of search. When employment increases as a result of reductions in market power, the marginal product of labor falls. This fall tempers the bargaining power of workers and thus dampens the increase in their real wages. The procyclical movement of wages is dampened further if the posting of vacancies is subject to increasing returns.
Keywords: cyclical wages; search-and-bargaining; large firms
JEL Codes: E240; E370; J640
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in market power (D40) | weaker bargaining position for workers (J59) |
| weaker bargaining position for workers (J59) | dampened increase in real wages (J39) |
| reductions in market power (D40) | dampened increase in real wages (J39) |
| increased employment (J68) | weaker bargaining position for workers (J59) |
| increased employment (J68) | dampened increase in real wages (J39) |
| marginal product of labor falls (J29) | weaker bargaining position for workers (J59) |
| marginal product of labor falls (J29) | dampened increase in real wages (J39) |
| posting of vacancies subject to increasing returns (J68) | dampened increase in real wages (J39) |
| elasticity of wages with respect to employment is in the range of 2 to 5 (J31) | dampened increase in real wages (J39) |