Wage Rigidity and Job Creation

43 Pages Posted: 6 Oct 2008

See all articles by Christian Haefke

Christian Haefke

Institute for Advanced Studies (IHS); NYU, Abu Dhabi; IZA Institute of Labor Economics

Marcus Sonntag

University of Bonn

Thijs van Rens

University of Warwick - Department of Economics; CEPR; Institute for the Study of Labor (IZA)

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Abstract

Standard macroeconomic models underpredict the volatility of unemployment fluctuations. A common solution is to assume wages are rigid. We explore whether this explanation is consistent with the data. We show that the wage of newly hired workers, unlike the aggregate wage, is volatile and responds one-to-one to changes in labor productivity. In order to replicate these findings in a search model, it must be that wages are rigid in ongoing jobs but flexible at the start of new jobs. This form of wage rigidity does not affect job creation and thus cannot explain the unemployment volatility puzzle.

Keywords: wage rigidity, search and matching model, business cycle

JEL Classification: E24, E32, J31, J41, J64

Suggested Citation

Haefke, Christian and Sonntag, Marcus and van Rens, Thijs, Wage Rigidity and Job Creation. IZA Discussion Paper No. 3714, Available at SSRN: https://ssrn.com/abstract=1278914 or http://dx.doi.org/10.2139/ssrn.1278914

Christian Haefke (Contact Author)

Institute for Advanced Studies (IHS) ( email )

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NYU, Abu Dhabi ( email )

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IZA Institute of Labor Economics

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Marcus Sonntag

University of Bonn ( email )

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Thijs Van Rens

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

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Institute for the Study of Labor (IZA) ( email )

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Germany

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