Growth, Unemployment and Wage Inertia

Abstract

We introduce wage setting via e¢ ciency wages in the neoclassical one-sector growth model to study the growth e¤ects of wage inertia. We compare the dynamic equilibrium of an economy with wage inertia with the equilibrium of an economy without it. We show that wage inertia a¤ects the long run employment rate and that the transitional dynamics of the main economic variables will be di¤erent because wages are a state variable when wage inertia is introduced. In particular, we show that the model with wage inertia can explain some growth patterns that cannot be explained when wages are ‡exible. We also study the growth e¤ects of permanent technological and …scal policy shocks in these two economies. During the transition, the growth e¤ects of technological shocks obtained when wages exhibit inertia may be the opposite of those obtained when wages are ‡exible. These technological shocks may have long run e¤ects if there is wage inertia. JEL classi…cation codes: O41.

Negative Interest Rate Policy in a Permanent Liquidity Trap

“…Commercial banks hold vault cash, and a tax is levied on vault cash holdings. In addition, I provide a microfoundation for nominal wage stickiness by modifying the fair wage setting of Raurich and Sorolla (2014).…”

“…(3) −n t f (e t ) denotes the disutility of effort, where n t is the amount of employed labor, e t is effort per unit of employed labor, and −f (e t ) is the disutility of effort per unit of employed labor. Following Raurich and Sorolla (2014), I assume a quadratic disutility function:…”

“…The last equation of (8) shows that in contrast with Raurich and Sorolla (2014), effort e t depends on nominal wages (not real wages). 6 I assume that…”

“…Raurich and Sorolla (2014) analyzed the relationship between real wage stickiness and economic growth in a neoclassical growth model where effort depends on real wages.…”

Necessity of labour market state’s regulation

“…The paper [17] has found a negative relation between long-run economic growth and unemployment. In the article [18] authors introduce wage inertia in the neoclassical one sector growth model. In the paper [19] is shown that a standard flexible price model with labour market frictions that allows hiring costs to depend on technology shocks may also lead to the same negative impact on labour inputs.…”