Wage Rigidity and Job Creation
Institute for Advanced Studies (IHS); Institute for the Study of Labor (IZA); Instituto de Análisis Económic (IAE) Barcelona
University of Bonn
Thijs Van Rens
University of Warwick - Department of Economics; CEPR; Institute for the Study of Labor (IZA)
Shimer (2005) and Hall (2005) have documented the failure of standard labor market search models to match business cycle fluctuations in employment and unemployment. They argue that it is likely that wages are not adjusted as regularly as suggested by the model, which would explain why employment is more volatile than the model predicts. We explore whether this explanation is consistent with the data. The main insight is that the relevant wage data for the search model are not aggregate wages, but wages of newly hired workers. Our results show that wages for those workers are much more volatile than aggregate wages and respond one-for-one to changes in labor productivity. Thus, we find no evidence for wage rigidity.
Number of Pages in PDF File: 57
Keywords: Wage Rigidity, Search and Matching Model, Business Cycle
JEL Classification: E24, E32, J31, J41, J64working papers series
Date posted: September 10, 2007
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