Sticky Wage Models with a Pro-Cyclical Real Wage
6 Pages Posted: 28 Feb 2017
Date Written: February 26, 2017
It is generally believed that the sticky wage model implies a counter-cyclical real wage and evidence of a pro-cyclical real wage has been interpreted as an “unsatisfactory feature of the sticky wage model.” (Shapiro, 1987). The purpose of this paper is to demonstrate a fallacy in this interpretation. Specifically, it is shown that the sticky wage model is consistent with a pro-cyclical real wage if the wage elasticity of labor supply to an individual firm is finite.
Keywords: Sticky Wage, Business Cycles, Real Wage, Wage Elasticity
JEL Classification: E30, E32, J20, J30, J47
Suggested Citation: Suggested Citation