The Effect of Heterogeneous Wage Contracts on Macroeconomic Volatility in a Financially Fragile Economy

Jongheuk Kim ()
Additional contact information
Jongheuk Kim: National Assembly Budget Office

East Asian Economic Review, 2017, vol. 21, issue 2, 167-197

Abstract: I build a small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model to investigate the effect of a heterogeneous wage contract between regular and temporary workers on a macroeconomic volatility in a financially fragile economy. The imperfect financial market condition is captured by a quadratic financial adjustment cost for borrowing foreign assets, and the labor market friction is captured by a Nash bargaining process which is only available to the regular workers when they negotiate their wages with the firms while the temporary workers are given their wage which simply equals the marginal cost. As a result of impulse responses to a domestic productivity shock, the higher elasticity of substitution between two types of workers and the lower weight on the regular workers in the firm’s production process induce the higher volatilities in most variables. This is reasoned that the higher substitutability creates more volatile wage determination process while the lower share of the regular workers weakens their Nash bargaining power in the contract process.

Keywords: DSGE; Nash Bargaining Wage Contract; Labor Market Friction; Open Economy Macroeconomics; Financial Market Fragility (search for similar items in EconPapers)
JEL-codes: C68 E52 F41 G10 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.11644/KIEP.EAER.2017.21.2.328 Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:eaerev:0328

Access Statistics for this article

East Asian Economic Review is currently edited by JE Lee

More articles in East Asian Economic Review from Korea Institute for International Economic Policy [30147] 3rd Floor Building C Sejong National Research Complex 370 Sicheong-daero Sejong-si, Korea. Contact information at EDIRC.
Bibliographic data for series maintained by JE Lee ().