The Cyclical Behavior of Unemployment and Wages under Information Frictions

Camilo Morales-Jiménez

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 1, 301-31

Abstract: I propose a new mechanism for sluggish wages based on workers' noisy information about the state of the economy. Wages do not respond immediately to a positive aggregate shock because workers do not (yet) have enough information to demand higher wages. The model is robust to two major criticisms of existing theories of sluggish wages and volatile unemployment, namely, that wages are flexible for new hires and the flow opportunity cost of employment (FOCE) is pro-cyclicality. The model generates volatility in the labor market as well as wage and FOCE elasticities with respect to productivity, consistent with the data.

JEL-codes: E24 E32 J24 J31 J63 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1257/mac.20180404

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