Re-interpreting the Evidence on the Effect of Implicit Contracts on the Movement of Wages over the Business Cycle

Iourii Manovskii and Marcus Hagedorn

No 925, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: This finding is important for several active lines of research in macro/labor. For example, in the literature on the quantitative analysis of labor search models, it is the behavior of wages that distinguishes different calibration strategies with radically different implications. Current consensus in the literature is that aggregate wages are pro-cyclical and quite volatile. However, this relatively high aggregate wage elasticity can be achieved by (1) wages of all workers being roughly equally cyclical, and (2) wages of workers in continuing relationships being relatively rigid due to implicit contracts and highly volatile wages of workers in new matches. Our findings support the interpretation of the data where wages in all matches respond roughly similarly to fluctuations in aggregate productivity.

Date: 2008
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