Wage, Inflation and Employment Dynamics with Labour Market Matching

47 Pages Posted: 26 Aug 2009

See all articles by Kai Philipp Christoffel

Kai Philipp Christoffel

European Central Bank (ECB)

James S. Costain

Banco de España - Research Department

Gregory de Walque

Facultés Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences; National Bank of Belgium

Keith Kuester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Tobias Linzert

European Central Bank (ECB); IZA Institute of Labor Economics

Stephen Millard

Bank of England

Olivier Pierrard

Banque Centrale du Luxembourg; IRES, UCL

Date Written: August 25, 2009

Abstract

In a search and matching environment, this paper assesses a range of modeling setups against macro evidence for the monetary transmission mechanism in the euro area. In particular, we assess right-to-manage vs. efficient bargaining, flexible vs. sticky wages, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour imply a sufficient degree of real rigidity, and so can reproduce inflation dynamics well. However, they imply too small a response on the employment margin. The other model variants fit employment dynamics better, but then imply too little real rigidity and, so, too volatile inflation, owing to strong responses of marginal wages and hours per employee. Further sources of real rigidities - possibly from outside of the labour market - seem to be needed to simultaneously explain the responses of wages, inflation and employment.

Keywords: inflation dynamics, labour market, business cycle, real rigidities

JEL Classification: E31, E32, E24, J64

Suggested Citation

Christoffel, Kai Philipp and Costain, James S. and de Walque, Gregory and de Walque, Gregory and Kuester, Keith and Linzert, Tobias and Millard, Stephen and pierrard, olivier, Wage, Inflation and Employment Dynamics with Labour Market Matching (August 25, 2009). Banco de Espana Working Paper No. 0918, Available at SSRN: https://ssrn.com/abstract=1461373 or http://dx.doi.org/10.2139/ssrn.1461373

Kai Philipp Christoffel (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

James S. Costain

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

Gregory De Walque

Facultés Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Keith Kuester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Tobias Linzert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Stephen Millard

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Olivier Pierrard

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

IRES, UCL ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

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