Hysteresis via Endogenous Rigidity in Wages and Participation

Cynthia Doniger and David Lopez-Salido

No 2017-044, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We document that the past three ?jobless? recoveries also featured asymmetries in labor force participation and labor compensation, with each falling to new lows during each cycle. We model these asymmetries as resulting from a strategic complementarity in firms' wage setting and workers' job search strategies. Strategic complementarity results in a continuum of possible equilibria with higher-wage equilibria welfare dominating lower-wage equilibria. Assuming that no economic agent deviates from an existing strategy unless deviation is a unilateral best response, the model exhibits (1) periods of endogenous rigidity in wages and participation, (2) persistent changes in wages, participation, and output in response to transitory movements in labor productivity, (3) sluggish recoveries including both a ?jobless\" phase, in which productivity recovers while unemployment remains elevated, and a ?wageless\" phase, in which employment recovers but wages remain depressed Calibrating the model suggests that the U.S. unemployment rate may need to fall to around 3 percent before labor compensation recovers to pre-Financial Crisis levels.

Keywords: Kinked Labor Supply; Strategic Complementarity; Hysteresis; Real Rigidity; Jobless and Wageless Recovery; Monopsony (search for similar items in EconPapers)
JEL-codes: D83 E24 J42 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2017-04-11
New Economics Papers: this item is included in nep-lma and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Hysteresis via Endogenous Rigidity in Wages and Participation (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-44

DOI: 10.17016/FEDS.2017.044r1

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