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In this paper we incorporate a labor market with matching frictions and wage.
We provide evidence on the fit of the New Phillips Curve (NPQ for the Euro area over the period 1970-1998, and use it as a tool to compare the characteristics of European inflation dynamics with those observed in the U.S. We also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs, as well as that of its two main components, namely, labor productivity and real wages. Some of the findings can be summarized as follows: (a) the NPC fits Euro area data very well, possibly better than U.S. data, (b) the degree of price stickiness implied by the estimates is substantial, but in line with survey evidence and U.S. estimates, (c) inflation dynamics in the Euro area appear to have a stronger forward- looking component (i.e., less inertia) than in the U.S., (d) labor market frictions, as manifested in the behavior of the wage markup, appear to have played a key role in shaping the behavior of marginal costs and, consequently, inflation in Europe.
Originally published in 1979, this reader presents an industrialist view of the labour market and economics as they stood at the time in the United States. The essays collated aim to answer macroeconomic questions on this topic as well as exploring issues related closely to employment and inflation. This title will be of interest to students of business and economics.
We build a model that combines two types of labor market rigidities: real wage rigidities and labor market frictions. The model is used to analyze the implications of the interaction of different degrees and types of labor market rigidities for the business cycle by looking at three dimensions (i) the persistence of key economic variables; (ii) their volatility; (iii) the length, average duration and intensity of recessions and expansions. We find that real wage rigidities and labor market frictions, while often associated under the same category of "labor market rigidities" may have opposite effects on business cycle fluctuations. When the rigidity lies in the wage determination mechanism, real wages cannot fully adjust and shocks tend to be absorbed through changes in quantities. A higher degree of real wage rigidities thus amplifies the response of the real economy to shocks, shortens the duration of the business cycle but makes it more intense. When the rigidity lies in the labor market, it is more costly for firms to hire new workers and therefore unemployment does not vary as much, thus increasing inflation volatility and smoothening the response of the real economy to shocks. The cycle gets longer but less severe. Analyzing the interaction of institutions we show that these effects are reinforcing if institutions are substitutes - in the sense that countries with high labor market frictions tend to have low real wage rigidities and vice versa - while they are offsetting if institutions are complements. The findings from the model are supported when compared to the data of a range of OECD countries.
We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation trade- off and for the conduct of monetary policy. We proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in un- employment. We show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of labor market frictions and real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy.