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The Cyclical Behavior of Unemployment and Wages under Information Frictions

Camilo Morales-Jimenez

No 2017-047, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: I propose a new mechanism for sluggish wages based on workers' noisy information about the state of the economy. Wages do not respond immediately to a positive aggregate shock because workers do not (yet) have enough information to demand higher wages. This increases firms' incentives to post more vacancies, which makes unemployment volatile and sensitive to aggregate shocks. The model is robust to two major criticisms of existing theories of sluggish wages and volatile unemployment: flexibility of wages for new hires and pro-cyclicality of the opportunity cost of employment. Calibrated to U.S. data, the model explains 70% of unemployment volatility.

Keywords: Information Frictions; Unemployment; Wages and compensation (search for similar items in EconPapers)
JEL-codes: E24 E32 J31 J63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
Date: 2017-03-01
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DOI: 10.17016/FEDS.2017.047

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