Calvo Wages in a Search Unemployment Model

Abstract:     
RBC models with search unemployment and wage renegotiation generate too much wage volatility and too stable unemployment rate. Shimer (2004) shows that it is possible to reproduce a volatility of unemployment similar to that observed in actual economies by imposing full real wage rigidity. We use a similar model but with Calvo wage contracts and we obtain a microfounded equation of real wage rigidities. The models with full wage flexibility or full wage rigidity are obtained as particular cases. We show that a contract length of about six quarters fits best the observed cyclical properties of wages and unemployment.

Number of Pages in PDF File: 12

Keywords: search unemployment, Calvo wage, cyclical properties

JEL Classification: E24, E32, J30, J41

working papers series