Fair Wages in a New Keynesian Model of the Business Cycle

CIRPEE Working Paper No. 03-20

48 Pages Posted: 19 Jun 2003

See all articles by Jean-Pierre Danthine

Jean-Pierre Danthine

University of Lausanne - Institute of Banking and Finance (IBF); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

André Kurmann

Drexel University - LeBow College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 2003

Abstract

We build a New Keynesian model of the business cycle with sticky prices and real wage rigidities motivated by efficiency wages of the gift exchange variety. Compared to a standard sticky price model, our Fair Wage model provides an explanation for structural unemployment and generates more plausible labor market dynamics - notably accounting for the low correlation between wages and employment. The fair wage induced real wage rigidity also significantly reduces the elasticity of marginal cost with respect to output. The smoother dynamics of real marginal cost increase both amplification and persistence of output responses to monetary shocks, thus remedying the well-known lack of internal propagation of standard sticky price models. We take these improvements as a strong endorsement of the addition of real wage rigidities to nominal price rigidities and conclude that the fair wage extension of this paper constitutes a promising platform for an enriched New Keynesian synthesis.

Keywords: Efficiency wages, Business cycles, Sticky prices, Persistence

JEL Classification: E24, E32, E52

Suggested Citation

Danthine, Jean-Pierre and Kurmann, André, Fair Wages in a New Keynesian Model of the Business Cycle (April 2003). CIRPEE Working Paper No. 03-20, Available at SSRN: https://ssrn.com/abstract=396080 or http://dx.doi.org/10.2139/ssrn.396080

Jean-Pierre Danthine

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

Lausanne, 1015
Switzerland
+41 21 692 3485 (Phone)
+41 21 692 3335 (Fax)

HOME PAGE: http://www.hec.unil.ch/jdanthine/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

André Kurmann (Contact Author)

Drexel University - LeBow College of Business ( email )

School of Economics
3220 Market Street
Philadelphia, PA 19104
United States

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