Wage rigidity and destabilizing spirals

Euiyoung Jung

Journal of Macroeconomics, 2023, vol. 77, issue C

Abstract: This paper investigates the impact of real wage rigidity on the (de)stabilizing role of demand feedback. I show that destabilizing supply–demand feedback driven by countercyclical precautionary savings demand against uninsured unemployment risk is fundamentally a matter of rigid real wage adjustments over business cycles. Given the estimated wage rigidity consistent with aggregate labor market dynamics in the United States, the quantitative results suggest that the unemployment risk channel has a minor impact on aggregate volatility.

Keywords: New Keynesian; Labor market; Uncertainty; Unemployment; Incomplete markets (search for similar items in EconPapers)
JEL-codes: E12 E21 E24 E29 E32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:77:y:2023:i:c:s0164070423000460

DOI: 10.1016/j.jmacro.2023.103546

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