Interacting nominal and real labour market rigidities

Abstract

This note investigates the interaction between nominal and real labour market rigidities. It shows nominal wage rigidity to have little effect on the welfare loss from labour adjustment costs under a labour supply shock. This implies that the second best effect of nominal price stickiness under real wage persistence studied in Duval and Vogel (2007) does not apply to the propagation of supply shocks under nominal wage rigidity and labour adjustment costs.JEL classification: E24, E32, J23, J30

Market structure and economic policy

“…There are reasons to justify a lower power of unions in bargaining over employment since only wage contracts are legally binding in most labour markets and thus convincing firms to remain on the contract curve for employment too, needs appropriate punishment strategies (Petrakis and Vlassis, 2000). Thus, it is likely that unions are less able to bargain over employment and we have also evidence that in Europe trade unions so far have been successful to maintain their strong position as wage setting institutions (Vogel, 2011). Since the case for structural reforms is particularly acute in Europe, it is important to have a model that captures this feature (Bokan and Hallett, 2006).…”