Microfounding Meaningful Wage Rigidity and Involuntary Job Loss

Abstract

The holy grail of Keynesian theorists during much of the postwar period has been to fully microfound meaningful wage rigidity (MWR), defined by its capacity to rationally suppress wage recontracting. This paper accomplishes that longstanding goal! MWR is shown to be a necessary condition for the existence of involuntary job loss (IJL) and uniquely enables causality from adverse nominal demand disturbances to IJL. Absent microfounded MWR and IJL, macroeconomics cannot be simultaneously micro-coherent and stabilization-relevant, making this paper a big deal.

Keywords: Macroeconomics, Wage Rigidity, Involuntary Job Loss, Unemployment, Labor Supply and Demand, Stabilization Policy

JEL Classification: E0, E2, E3, E5, J2, J3