Working Paper: NBER ID: w12584
Authors: Roger E. A Farmer; Andrew Hollenhorst
Abstract: Most dynamic stochastic general equilibrium models of the macroeconomy assume that labor is traded in a spot market. Two exceptions by David Andolfatto and Monika Merz combine a two-sided search model with a one-sector real business cycle model. These hybrid models are successful, in some dimensions, but they cannot account for observed volatility in unemployment and vacancies. Following suggestions by Robert Hall and Robert Shimer, this paper shows that a relatively standard DSGE model with sticky wages can account for these facts. Using a second-order approximation to the policy function we simulate moments of an artificial economy with and without sticky wages and we document the dependence of unemployment and vacancy volatility on two key parameters; the disutility of effort and the degree of wage stickiness. We compute the welfare costs of the sticky wage equilibrium and find them to be small.
Keywords: Dynamic Stochastic General Equilibrium; Labor Market; Wage Rigidity
JEL Codes: E32; J6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sticky wages (J31) | volatility of unemployment (J64) |
| sticky wages (J31) | volatility of vacancies (J69) |
| disutility of effort + sticky wages (J31) | volatility of unemployment (J64) |
| disutility of effort + sticky wages (J31) | volatility of vacancies (J69) |
| sticky wages (J31) | welfare costs of maintaining a sticky wage equilibrium (J32) |
| rigid wage model (J31) | representation of labor market behavior (J29) |
| rigid wage model (J31) | unemployment volatility (J64) |