Cyclical Wages in a Search-and-Bargaining Model with Large Firms

51 Pages Posted: 13 Aug 2006 Last revised: 20 Oct 2006

See all articles by Julio J. Rotemberg

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

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Date Written: August 2006

Abstract

This paper presents a complete general equilibrium model with flexible wages where the degree to which wages and productivity change when cyclical employment changes is roughly consistent with postwar U.S. data. Firms with market power are assumed to bargain simultaneously with many employees, each of whom finds himself matched with a firm only after a process of search. When employment increases as a result of reductions in market power, the marginal product of labor falls. This fall tempers the bargaining power of workers and thus dampens the increase in their real wages. The procyclical movement of wages is dampened further if the posting of vacancies is subject to increasing returns.

Suggested Citation

Rotemberg, Julio J., Cyclical Wages in a Search-and-Bargaining Model with Large Firms (August 2006). NBER Working Paper No. w12415. Available at SSRN: https://ssrn.com/abstract=923067

Julio J. Rotemberg (Contact Author)

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

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United States
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National Bureau of Economic Research (NBER) (deceased)

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