How Sticky Wages in Existing Jobs Can Affect Hiring

We consider a matching model of employment with flexible wages for new hires but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort’s response can greatly increase wage inertia. (JEL E24, J23, J31, J41, M51)

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Unemployment Fluctuations, Match Quality, and the Wage Cyclicality of New Hires

The Review of Economic Studies ◽

10.1093/restud/rdaa004 ◽

2020 ◽

Vol 87 (4) ◽

pp. 1876-1914 ◽

Cited By ~ 4

Author(s):

Mark Gertler ◽

Christopher Huckfeldt ◽

Antonella Trigari

Keyword(s):

Job Search ◽

Marginal Cost ◽

Market Volatility ◽

Match Quality ◽

Composition Effects ◽

Reasonable Approximation ◽

Job Match ◽

Wage Cyclicality ◽

Sticky Wages ◽

New Hires

Abstract We revisit the issue of the high cyclicality of wages of new hires. We show that after controlling for composition effects likely involving procyclical upgrading of job match quality, the wages of new hires are no more cyclical than those of existing workers. The key implication is that the sluggish behaviour of wages for existing workers is a better guide to the cyclicality of the marginal cost of labour than is the high measured cyclicality of new hires wages unadjusted for composition effects. Key to our identification is distinguishing between new hires from unemployment versus those who are job changers. We argue that to a reasonable approximation, the wages of the former provide a composition-free estimate of the wage flexibility, while the same is not true for the latter. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and heterogeneous match quality, and show that it can account for both the panel data evidence and aggregate evidence on labour market volatility.

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A NOTE ON THE RELATION BETWEEN SEARCH COSTS AND SEARCH DURATION FOR NEW HIRES

Macroeconomic Dynamics ◽

10.1017/s136510052000005x ◽

2020 ◽

pp. 1-14 ◽

Cited By ~ 1

Author(s):

Francesco Carbonero ◽

Hermann Gartner

Keyword(s):

Labor Market ◽

Instrumental Variable ◽

Search Costs ◽

Market Volatility ◽

Fixed Costs ◽

Search And Matching ◽

Matching Model ◽

Instrumental Variable Estimation ◽

Search And Matching Model ◽

New Hires

Fixed search costs, that is, costs that do not vary with search duration, can amplify the cyclical volatility of the labor market. To assess the size of fixed costs, we analyze the relation between search costs and search duration using German establishment data. An instrumental variable estimation shows no relation between search duration and search costs. We conclude that search costs are mainly fixed costs. Furthermore, we show that a search and matching model, calibrated for Germany with fixed costs close to 75%, can generate labor market volatility that is consistent with the data.

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Endogenous Separations, Wage Rigidities, and Unemployment Volatility

American Economic Journal Macroeconomics ◽

10.1257/mac.20180314 ◽

2022 ◽

Vol 14 (1) ◽

pp. 332-354

Author(s):

Mikael Carlsson ◽

Andreas Westermark

Keyword(s):

Wage Rigidity ◽

Empirical Literature ◽

Search And Matching ◽

Matching Model ◽

Sufficient Statistic ◽

Search And Matching Model ◽

Unemployment Volatility ◽

Newly Hired ◽

New Hires ◽

Relevant Degree

We show that in microdata, as well as in a search and matching model with flexible wages for new hires, wage rigidities of incumbent workers have substantial effects on separations and unemployment volatility. Allowing for an empirically relevant degree of wage rigidities for incumbent workers drives unemployment volatility as well as the volatility of vacancies and tightness to that in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes. This finding affects the interpretation of a large empirical literature on wage rigidities. (JEL E24, J23, J31, J41, J63)

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Sticky Wages: Evidence from Quarterly Microeconomic Data

American Economic Journal Macroeconomics ◽

10.1257/mac.4.3.1 ◽

2012 ◽

Vol 4 (3) ◽

pp. 1-32 ◽

Cited By ~ 24

Author(s):

Hervé Le Bihan ◽

Jérémi Montornès ◽

Thomas Heckel

Keyword(s):

Sample Selection ◽

Econometric Analysis ◽

Selection Model ◽

Time Dependent ◽

Nominal Wage ◽

Sample Period ◽

Wage Setting ◽

Wage Stickiness ◽

State Dependent ◽

Sticky Wages

Using an original micro-dataset from France, we investigate nominal wage stickiness. Nominal wage changes are found to occur at a quarterly frequency of around 38 percent over our sample period, and to be to a large extent staggered across establishments, and very synchronized within establishments. We carry out an econometric analysis of wage changes based on a two-threshold sample selection model. Our results are that the timing of wage adjustments is time-dependent as opposed to state-dependent, there is evidence of predetermination in wage changes, and both backward and forward-looking behavior is relevant in wage setting. (JEL E24, E52, J31)

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Employment Fluctuations with Equilibrium Wage Stickiness

The American Economic Review ◽

10.1257/0002828053828482 ◽

2005 ◽

Vol 95 (1) ◽

pp. 50-65 ◽

Cited By ~ 595

Author(s):

Robert E Hall

Keyword(s):

Labor Market ◽

Job Loss ◽

Driving Forces ◽

Economic Equilibrium ◽

New Model ◽

Wage Stickiness ◽

Employment Fluctuations ◽

Qualitative Responses ◽

Sticky Wages ◽

The Way

Following a recession, the aggregate labor market is slack–employment remains below normal and recruiting efforts of employers, as measured by help-wanted advertising and vacancies, are low. A model of matching friction explains the qualitative responses of the labor market to adverse shocks, but requires implausibly large shocks to account for the magnitude of observed fluctuations. The incorporation of wage stickiness vastly increases the sensitivity of the model to driving forces. I develop a new model of the way that wage stickiness affects unemployment. The stickiness arises in an economic equilibrium and satisfies the condition that no worker-employer pair has an unexploited opportunity for mutual improvement. Sticky wages neither interfere with the efficient formation of employment matches nor cause inefficient job loss. Thus the model provides an answer to the fundamental criticism previously directed at sticky-wage models of fluctuations.

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