Abstract
With nominal wage rigidities, it is crucial to distinguish whether wages are set by workers or firms — whether we have monopoly or monopsony power. This paper provides a model of monopsony power in the labour market and a monopsonistic Phillips Curve. If wages are set by firms who face nominal rigidities, and there is inflation, firms cannot adjust their wages fully. The real wage falls, and labour supply hence output decreases. This provides a Phillips Curve where the output gap is negatively correlated with wage inflation. In such a world monetary policy affects the intertemporal labour supply, while the Phillips Curve is a labour demand curve. Interest rate cuts reduce the labour supply instead of boosting demand: they are contractionary.
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