Sticky Wages and Sectoral Labor Comovement

Abstract:     
A defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity. Standard models cannot account for this phenomenon. This paper develops and estimates a two-sector dynamic general equilibrium model that can account for this key regularity. My model incorporates three shocks to the economy: monetary policy shocks, neutral technology shocks, and embodied technology shocks in the capital producing sector. The estimated model is able to account for the response of the US economy to all three shocks. Using this model, I argue that the key friction underlying sectoral comovement is rigidity in nominal wages.

Number of Pages in PDF File: 34

Keywords: Comovement, Business cycles, Sticky wage

JEL Classification: E20, E32, O41, O42

working papers series