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NBB Conference

This paper delves into a new Keynesian model with frictional unemployment, aiming for a better representation of the labor market dynamics. It explores various factors such as labor market flows, tensions, hours of work, unemployment, and real wage rigidity, reexamining the interactions between nominal and real rigidities. The analysis includes a search model approach, revisiting old problems and critiquing existing models, with the goal of enhancing the understanding of wage dynamics and job market functioning. The study incorporates different modeling strategies and contributes to the broader discourse on labor market economics.

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NBB Conference

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  1. NBB Conference Nominal Wage Rigdities in a New Keynesian Model with Frictional Unemployment by Bodart, de Walque, Pierrard, Sneessens, Wouters(UCL, NBB and BCL)

  2. Motivation Starting pointfull-fledged DGSE NKM (Smets-Wouters (2003))Objective better labor market representation • labor market flows and tensions; • Beveridge curve • hours of work vs (un-)employment • reexamine interactions nominal – real rigidities

  3. Some stylized facts • negative correlation u-v (  -0.95) • volatility of u and v (>5.0) • real wage smooth (.5) slightly procyclical (.5) • positive correlation job finding rate-tensions Natural candidate: search model à la Mortensen-Pissarides

  4. Back to an old problem…  C B   A (Hall( 2003), Shimer (2004)) wages total hours of work

  5. Beveridge Curve (Shimer (2005)) B  vacancies two issues: volatility, correlation A  unemployment

  6. (Some) Related Contributions • Merz (1995), Andolfatto (1996), • Hall (2003), Shimer (2004) (critique of standard Nash bargaining) • Bodart-Pierrard-Sneessens (2005)Calvo wage contracts (old and new jobs) • Gertler-Trigari (2006)(large firms, quadratic labor adjustment costs) • this paper (full-fledged DSGE)

  7. Alternative Routes • Krause-Lubik (2003) (endo wage « rigidity » via on-the-job search) • Trigari (2004)(wage-hours bargaining; endo job destruction) • Christoffel-Kuester-Linzert (2005)(wage adj costs; sunk vacancy cost) • Fujita-Ramey (2005) (sunk vacancy costs) • Kuester (2006) (« integrates » wage and price setting)

  8. Modelling Strategy As close as possible to existing DSGE (Smets-Wouters (2003)) • three types of firms sectors (retailers, intermediate, labor services) • real rigidities (monopolistic competition + labor search) • price and wage rigiditiesCalvo contracts (old and new jobs)

  9. Model Ingredients Consumers • perfect insurance… • decision 1: savings (with habit formation) • decison 2: capital utilization rate • decison 3: investment (capital adj. costs) • resource constraint= wage (fixed+variable) or unempl.benefit + return on capital and bonds + redistributed profits

  10. Firms Behavior Final goods producers • price takers on all markets • inputs = differentiated intermediate goods • perfectly competitive final goods market Intermediate Goods Producers • monopolistic competition  price setters • inputs = labor (hours*workers)+capital • perfectly competitive input markets

  11. Prices and Wages Price Setting • Monopolistic competition • Calvo contracts  firms with different sizes, identical technologies Wage Setting • One job-one firm setup (labor service firm) • Nash bargaining, in Calvo framework • Distinguihes old and new jobs • Sluggish average wage

  12. Vacancy Costs and Free Entry Condition A la Mortensen-Pissarides (MP) • fixed recurrent cost a1 • cost per hire = a1 * 1/q A la Gertler-Trigari (GT) • variable recurrent cost such that… • cost per hire = a2 * hiring rate A la Fujita-Ramey (FR) • sunk cost (heterogeneous across new entrants) •  new entrants: « marginal » sunk cost = job value

  13. Evaluating the Model • Calibrationentirely based on « extraneous » information (empirical estimates, exit and entry probabilities) • Simulation of streamlined model (no « frictions » nor price rigidity)comparison with Gertler-Trigari (2006) • Simulation of full-fledged NKMlabor search vs monopolistic labor market

  14. Productivity Shock in Streamlined Model

  15. Productivity Shock in Streamlined Model

  16. Productivity Shock in Streamlined Model

  17. Interest Rate Shock in Complete Model

  18. All Three Shocks in Complete Model Three types of shocks • productivity • interest rate • public expenditures Assumed not to be correlated

  19. All Three Shocks in Complete Model

  20. Conclusions • Does as well as MC model on traditional variables; needs fine tuning of calibration  estimation • Reproduces fairly well the cyclical properties of key labor market variables • Some weak points remain : hours of work, inflation response

  21. Further research… • vacancy cost and free entry condition • extensive vs intensive margin • bargaining and overtime compensation • articulation wage-price decision • endogenous separation

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