Uncertainty, Wages, and the Business Cycle

Matteo Cacciatore and Federico Ravenna

No 27951, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that limited wage flexibility in economic downturns generates strong and state-dependent amplification of uncertainty shocks. It also explains the cyclical behavior of empirical measures of uncertainty. Central to our analysis is the existence of matching frictions in the labor market and an occasionally binding constraint on downward wage adjustment. The wage constraint enhances the concavity of firms' hiring rule, generating an endogenous profit-risk premium. In turn, uncertainty shocks increase the profit-risk premium when the economy operates close to the wage constraint. This implies that higher uncertainty can severely deepen a recession, although its impact is weaker on average. Non-linear local projections and VAR estimates support the model predictions. Additionally, the variance of the unforecastable component of future economic outcomes always increases at times of low economic activity. Thus, measured uncertainty rises in a recession even in the absence of uncertainty shocks.

JEL-codes: E2 E32 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-lma and nep-mac
Note: EFG
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Published as Matteo Cacciatore & Federico Ravenna, 2021. "Uncertainty, Wages and the Business Cycle," The Economic Journal, vol 131(639), pages 2797-2823.

Downloads: (external link)
http://www.nber.org/papers/w27951.pdf (application/pdf)

Related works:
Journal Article: Uncertainty, Wages and the Business Cycle (2021)
Working Paper: Uncertainty, Wages, and the Business Cycle (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:27951

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w27951

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().