Firm Wage Setting and On-the-Job Search Limit Wage-Price Spirals

Justin Bloesch, Seung Joo Lee () and Jacob Weber ()
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Seung Joo Lee: https://www.sbs.ox.ac.uk/about-us/people/seung-joo-lee

No 1126, Staff Reports from Federal Reserve Bank of New York

Abstract: We develop a novel, tractable New Keynesian model where firms post wages and workers search on the job, motivated by microeconomic evidence on wage setting. Because firms set wages to avoid costly turnover, the rate that workers quit their jobs features prominently in the model’s wage Phillips curve, matching U.S. empirical evidence. We then examine the response of wages to cost-of-living shocks, i.e., shocks that raise the price of household’s consumption goods but do not affect the marginal product of labor. Such shocks pass through to wages only to the extent that higher cost of living improves workers’ outside options, such as competing jobs or unemployment, relative to their current job. However, higher cost of living lowers real wages at all jobs evenly, and unemployment is rarely a credible outside option. We conclude that wage posting and on-the-job search limit the scope for pass-through from prices to wages.

Keywords: monopsony; inflation; cost-of-living shocks; on-the-job search (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 97
Date: 2024-10-01
New Economics Papers: this item is included in nep-dge and nep-lab
Note: Revised February 2025. Previous title: “Do Cost-of-Living Shocks Pass Through to Wages?”
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DOI: 10.59576/sr.1126

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