Growth, unemployment and wage inertia

Xavier Raurich and Valeri Sorolla

No 2014/309, UB School of Economics Working Papers from University of Barcelona School of Economics

Abstract: We introduce wage setting via efficiency wages in the neoclassical one-sector growth model to study the growth effects of wage inertia. We compare the dynamic equilibrium of an economy with wage inertia with the equilibrium of an economy without it. We show that wage inertia affects the long run employment rate and that the transitional dynamics of the main economic variables will be different because wages are a state variable when wage inertia is introduced. In particular, we show that the model with wage inertia can explain some growth patterns that cannot be explained when wages are flexible. We also study the growth effects of permanent technological and fiscal policy shocks in these two economies. During the transition, the growth effects of technological shocks obtained when wages exhibit inertia may be the opposite of those obtained when wages are flexible. These technological shocks may have long run effects if there is wage inertia.

Keywords: Wage inertia; Growth; Efficiency wages; Transitional dynamics; Unemployment. (search for similar items in EconPapers)
JEL-codes: O41 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-gro and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Growth, unemployment and wage inertia (2014)
Working Paper: Growth, Unemployment and Wage Inertia (2012)
Working Paper: Growth, Unemployment and Wage Inertia (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ewp:wpaper:309web

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