Sticky Consumption and Rigid Wages
Stockholm School of Economics WPS62
Posted: 20 May 1998
Date Written: July 1995
The paper suggests a channel through which past expectations affect current wage aspirations, leading to real wage rigidity. Expectations have a long-run impact on the composition of consumption because they determine the purchase of durables. Due to adjustment costs, moderate changes in income are absorbed by non-durable consumption only. We show that when labour demand is unexpectedly low, workers are risk seeking; they prefer a risk of becoming unemployed to a substantial reduction of the real wage. Conversely, they show moderation when labour demand is unexpectedly high.
JEL Classification: J51, J64
Suggested Citation: Suggested Citation