Sticky Consumption and Rigid Wages
Tore Ellingsen () and
Steinar Holden ()
No 62, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics
The paper suggests a channel through which past expectations affect current wage aspirations, leading to real wage rigidity. Expectations have a long run impact on the composition of consumption, because they determine the purchase of durables. Due to adjustment costs, moderate changes in income are absorbed by non-durable consumption only. We show that when labour demand is unexpectedly low, workers are risk seeking; they prefer a risk of becoming unemployed to a substantial reduction of the real wage. Conversely, they show moderation when labour demand is unexpectedly high.
Keywords: Wage rigidity; aspirations; durables (search for similar items in EconPapers)
JEL-codes: J51 J64 (search for similar items in EconPapers)
Pages: 27 pages
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Working Paper: Sticky Consumption and Rigid Wages (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0062
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