The Adjustments of Hours and Real Wages to Technology Shocks: Assessing the Role of Nominal Rigidities

Abstract

Nominal rigidities are generally viewed as important for the transmission of monetary policy. We argue that nominal rigidities are important also for the transmission of technology shocks, especially for explaining their effects on hours and real wages. Evidence suggests that a positive technology shock leads to a short-run decline in labor hours and a gradual rise in real wages. We examine the ability of an RBC model augmented with real frictions, a pure sticky-price model, a pure sticky-wage model, and a model combining sticky prices and sticky wages in accounting for this evidence. We find that, according to this metric, the model with nominal wage and price rigidities is more successful than others. This finding is robust and holds true for a relatively small Frisch elasticity of hours and a relatively high frequency of price reoptimization that are consistent with microeconomic evidence.