Sticky Consumption and Rigid Wages

Stockholm School of Economics WPS62

Posted: 20 May 1998

See all articles by Tore Ellingsen

Tore Ellingsen

Stockholm School of Economics - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 1995

Abstract

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

Ellingsen, Tore and Holden, Steinar, Sticky Consumption and Rigid Wages (July 1995 ). Stockholm School of Economics WPS62, Available at SSRN: https://ssrn.com/abstract=3112

Tore Ellingsen (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

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Norwegian School of Economics (NHH) - Department of Economics

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Steinar Holden

University of Oslo - Department of Economics ( email )

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HOME PAGE: http://folk.uio.no/~sholden/

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CESifo (Center for Economic Studies and Ifo Institute)

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