Labour Market Search, Wage Bargaining and Inflation Dynamics

Antonella Trigari ()

No 268, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The model is used to study the dynamic response of the economy to a monetary policy shock. The labor market displays search and matching frictions and bargaining over real wages and hours of work. Search frictions generate unemployment in equilibrium. Wage bargaining introduces a microfounded real wage rigidity. First, I study a Nash bargaining model. Then, I develop an alternative bargaining model, which I refer to as right-to-manage bargaining. Both models have similar predictions in terms of real wage dynamics: bargaining significantly reduces the volatility of the real wage. But they have different implications for inflation dynamics: under right-to-manage, the real wage rigidity also results in smaller fluctuations of inflation. These findings are consistent with recent evidence suggesting that real wages and inflation only vary by a moderate amount in response to a monetary shock. Finally, the model can explain important features of labor-market fluctuations. In particular, a monetary expansion leads to a rise in job creation and to a hump-shaped decline in unemployment.

Date: 2004
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (18)

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