Hysteresis Via Endogenous Rigidity in Wages and Participation

43 Pages Posted: 20 Apr 2017 Last revised: 6 Mar 2019

See all articles by Cynthia Doniger

Cynthia Doniger

Board of Governors of the Federal Reserve System

David Lopez-Salido

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-04-11

Abstract

We document that the past three “jobless” recoveries also featured asymmetries in labor force participation and labor compensation, with each falling to new lows during each cycle. We model these asymmetries as resulting from a strategic complementarity in firms’ wage setting and workers’ job search strategies. Strategic complementarity results in a continuum of possible equilibria with higher-wage equilibria welfare dominating lower-wage equilibria. Assuming that no economic agent deviates from an existing strategy unless deviation is a unilateral best response, the model exhibits (1) periods of endogenous rigidity in wages and participation, (2) persistent changes in wages, participation, and output in response to transitory movements in labor productivity, (3) sluggish recoveries including both a “jobless” phase, in which productivity recovers while unemployment remains elevated, and a “wageless” phase, in which employment recovers but wages remain depressed. Calibrating the model suggests that the U.S. unemployment rate may need to fall to around 3 percent before labor compensation recovers to pre-Financial Crisis levels.

Keywords: Kinked Labor Supply, Strategic Complementarity, Hysteresis, Real Rigidity, Jobless and Wageless Recovery, Monopsony

JEL Classification: D83, E24, J42

Suggested Citation

Doniger, Cynthia and Lopez-Salido, David, Hysteresis Via Endogenous Rigidity in Wages and Participation (2017-04-11). FEDS Working Paper No. 2017-044. Available at SSRN: https://ssrn.com/abstract=2953561 or http://dx.doi.org/10.17016/FEDS.2017.044r1

Cynthia Doniger (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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