The Cyclical Behavior of Unemployment and Wages under Information Frictions

Camilo Morales-Jimenez
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Camilo Morales-Jimenez: Board of Governors of the Federal Reserve System

No 366, 2017 Meeting Papers from Society for Economic Dynamics

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: fexibility 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.

Date: 2017
New Economics Papers: this item is included in nep-dge
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