Abstract
We show that in microdata, as well as in a search and matching model with flexible wages for new hires, wage rigidities of incumbent workers have substantial effects on separations and unemployment volatility. Allowing for an empirically relevant degree of wage rigidities for incumbent workers drives unemployment volatility as well as the volatility of vacancies and tightness to that in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes. This finding affects the interpretation of a large empirical literature on wage rigidities. (JEL E24, J23, J31, J41, J63)
Highlights
In a recent very in‡uential paper, Pissarides (2009) showed that in the baseline search and matching model job creation, and unemployment volatility, is only a¤ected by wage setting in new matches
The results presented above show that a model with ‡exible wages for new hires, but with realistic amount of wage rigidities for incumbent workers, can generate unemployment volatility in the search and matching framework in line with the data
In this paper we return to the question of whether or not wage rigidities for incumbent workers a¤ect macroeconomic outcomes
Summary
In a recent very in‡uential paper, Pissarides (2009) showed that in the baseline search and matching model job creation, and unemployment volatility, is only a¤ected by wage setting in new matches This is important, since it points to the degree of wage rigidity of new hires as the key statistic determining labor-market dynamics as opposed to wage rigidities in general.. Since general equilibrium feedback e¤ects may overturn partial equilibrium intuition, we proceed by introducing endogenous separations in combination with rigid wages for incumbent workers in a DSGE model In this setup, we ...nd that an empirically relevant degree of wage rigidities for incumbent workers has large quantitative e¤ects on unemployment volatility even when wages for new hires are fully ‡exible, producing a standard deviation of unemployment that matches the standard deviation in the data.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
