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Wage, inflation and employment dynamics with labour market matching

Kai Christoffel, James Costain, Grégory de Walque (), Keith Kuester, Tobias Linzert, Stephen Millard () and Olivier Pierrard ()

No 918, Working Papers from Banco de España, Working Papers Homepage

Abstract: In a search and matching environment, this paper assesses a range of modeling setups against macro evidence for the monetary transmission mechanism in the euro area. In particular, we assess right-to-manage vs. efficient bargaining, flexible vs. sticky wages, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour imply a sufficient degree of real rigidity, and so can reproduce inflation dynamics well. However, they imply too small a response on the employment margin. The other model variants fit employment dynamics better, but then imply too little real rigidity and, so, too volatile inflation, owing to strong responses of marginal wages and hours per employee. Further sources of real rigidities - possibly from outside of the labour market - seem to be needed to simultaneously explain the responses of wages, inflation and employment.

Keywords: Inflation Dynamics; Labour Market; Business Cycle; Real Rigidities (search for similar items in EconPapers)
JEL-codes: E31 E32 E24 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab, nep-mac and nep-mon
Date: 2009-08
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0918

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