Economics at your fingertips  

Pecuniary externalities in economies with downward wage rigidity

Martin Wolf ()

Journal of Monetary Economics, 2020, vol. 116, issue C, 219-235

Abstract: A pecuniary externality in economies with downward nominal wage rigidity leads firms to hire too many workers in expansions, which leads to too much unemployment in recessions. When firms hire more workers, firms fail to internalize that competition for workers between firms pushes up the aggregate wage, which imposes a negative externality over other firms. The externality can be resolved by a macroprudential tax on labor in expansions. In the calibrated model, the tax reduces the welfare cost of downward nominal wage rigidity by up to 90%, as it makes the economy significantly less exposed to unemployment crises.

Keywords: Macroprudential policy; Unemployment; Monopsony; Pecuniary externality; Downward nominal wage rigidity (search for similar items in EconPapers)
JEL-codes: E24 E32 F41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Pecuniary Externalities in Economies with Downward Wage Rigidity (2019) Downloads
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:

DOI: 10.1016/j.jmoneco.2019.10.006

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2021-09-12
Handle: RePEc:eee:moneco:v:116:y:2020:i:c:p:219-235