Labour force participation, wage rigidities, and inflation

Francesco Nucci and Marianna Riggi ()

No 2015/1, DSS Empirical Economics and Econometrics Working Papers Series from Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome

Abstract: The fall in the US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are also shown to account for these patterns, with the participation rate being procyclical in the US since the inception of the crisis and countercyclical in the euro area. We rationalize these diverging developments by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching framework. We show that the "added worker" e¤ect might outweigh the "discouragement effect" if real wage rigidities are allowed for and/or habit in consumers.preferences is sufficiently strong. We then draw the implications of variable labor force participation for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on in.ation stemming from the lack of downward adjustment of real wages are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation associated with wage rigidities.

Keywords: Labor Force Participation; Wage Rigidities; Inflation (search for similar items in EconPapers)
JEL-codes: E31 J21 J30 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-12
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.dss.uniroma1.it/RePec/sas/wpaper/20152_nr.pdf First version, 2015 (application/pdf)

Related works:
Journal Article: Labor force participation, wage rigidities, and inflation (2018)
Working Paper: Labor force participation, wage rigidities, and inflation (2016)
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:sas:wpaper:20152

Access Statistics for this paper

More papers in DSS Empirical Economics and Econometrics Working Papers Series from Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome Contact information at EDIRC.
Bibliographic data for series maintained by Stefano Fachin ( this e-mail address is bad, please contact ).