Labor Market Search, Wage Bargaining and Inflation Dynamics

IGIER Working Paper No. 268

38 Pages Posted: 15 Sep 2004

See all articles by Antonella Trigari

Antonella Trigari

Bocconi University - Department of Economics

Date Written: September 2004

Abstract

This paper integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The model is used to study the dynamic response of the economy to a monetary policy shock. The labor market displays search and matching frictions and bargaining over real wages and hours of work. Search frictions generate unemployment in equilibrium. Wage bargaining introduces a microfounded real wage rigidity. First, I study a Nash bargaining model. Then, I develop an alternative bargaining model, which I refer to as right-to-manage bargaining. Both models have similar predictions in terms of real wage dynamics: bargaining significantly reduces the volatility of the real wage. But they have different implications for inflation dynamics: under right-to-manage, the real wage rigidity also results in smaller fluctuations of inflation. These findings are consistent with recent evidence suggesting that real wages and inflation only vary by a moderate amount in response to a monetary shock. Finally, the model can explain important features of labor-market fluctuations. In particular, a monetary expansion leads to a rise in job creation and to a hump-shaped decline in unemployment.

Keywords: Monetary policy, labor market search, business cycles, inflation

JEL Classification: E52, J64, E24, E32, E31

Suggested Citation

Trigari, Antonella, Labor Market Search, Wage Bargaining and Inflation Dynamics (September 2004). IGIER Working Paper No. 268, Available at SSRN: https://ssrn.com/abstract=590044 or http://dx.doi.org/10.2139/ssrn.590044

Antonella Trigari (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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