Credible Wage Bargaining and the Joint Dynamics of Unemployment and Inflation

Pierrick Clerc

Working papers from Banque de France

Abstract: Empirically, unemployment is highly volatile while inflation displays inertia, even though marginal cost is pro-cyclical. It was argued that real wage rigidities would no longer help replicate these facts, once firms determine employment and hours per worker. In this paper, real wage stickiness stems from wage bargaining with credible threat points, that we embed into a New Keynesian framework in which firms adjust both labor margins. This model notably reproduces the large jump in unemployment in the Great Recession. Moreover, inflation inertia is made consistent with pro-cyclical marginal cost since the credible bargaining induces strategic complementarities between firms.

Keywords: New-Keynesian model; labor market frictions; unemployment; inflation; real wage rigidities. (search for similar items in EconPapers)
JEL-codes: E32 E50 J63 J64 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:568

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