Macroeconomic Implications of Downward Wage Rigidities

34 Pages Posted: 13 Apr 2011

See all articles by Mirko Abbritti

Mirko Abbritti

University of Navarra

Stephan Fahr

European Central Bank

Date Written: March 18, 2011

Abstract

Growth of wages, unemployment, employment and vacancies exhibit strong asymmetries between expansionary and contractionary phases. In this paper we analyze to what degree downward wage rigidities in the bargaining process affect other variables of the economy. We introduce asymmetric wage adjustment costs in a New-Keynesian DSGE model with search and matching frictions in the labor market. We find that the presence of downward wage rigidities strongly improves the fit of the model to the skewness of variables and the relative length of expansionary and contractionary phases even when detrending the data. Due to the asymmetry, wages increase more easily in expansions, which limits vacancy posting and employment creation, similar to the flexible wage case. During contractions nominal wages decrease slowly, shifting the main burden of adjustment to employment and hours worked. The asymmetry also explains the differing transmission of positive and negative demand shocks from wages to inflation. Downward wage rigidities help explaining the asymmetric business cycle of many OECD countries where long and smooth expansions with low growth rates are followed by sharp but short recessions with large negative growth rates.

Keywords: labor market, unemployment, downward wage rigidity, asymmetric adjustment costs, non-linear dynamics

JEL Classification: E31, E52, C61

Suggested Citation

Abbritti, Mirko and Fahr, Stephan Alexander, Macroeconomic Implications of Downward Wage Rigidities (March 18, 2011). ECB Working Paper No. 1321. Available at SSRN: https://ssrn.com/abstract=1789807

Mirko Abbritti (Contact Author)

University of Navarra ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

Stephan Alexander Fahr

European Central Bank ( email )

Kaiserstr. 29
Frankfurt am Main, DE 60066
Germany

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