Abstract
We consider a matching model of employment with flexible wages for new hires but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen- Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort’s response can greatly increase wage inertia.
| Original language | English |
|---|---|
| Pages (from-to) | 1-37 |
| Number of pages | 37 |
| Journal | American Economic Journal: Macroeconomics |
| Volume | 14 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 2022 |
Bibliographical note
Funding Information:* Bils: Department of Economics, University of Rochester (email: mark.bils@rochester.edu); Chang: Department of Economics, Seoul National University (email: yohg@snu.ac.kr); Kim: Department of Economics, Yonsei University (email: sunbin.kim@yonsei.ac.kr). Virgiliu Midrigan was coeditor for this article. We thank Corina Boar, Sumin Chun, and Hyun-Tae Kim for their excellent research assistance. For helpful comments, we thank Marianna Kudlyak, Jose Mustre-del-Rio, and Harald Uhlig. This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5A2A01011108).
Publisher Copyright:
© 2022, American Economic Journal: Macroeconomics. All rights reserved.
All Science Journal Classification (ASJC) codes
- Economics, Econometrics and Finance(all)