The Consequences of Rigid Wages in Search Models

16 Pages Posted: 8 Mar 2004 Last revised: 19 Sep 2022

See all articles by Robert Shimer

Robert Shimer

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2004

Abstract

The standard theory of equilibrium unemployment, the Mortensen-Pissarides search and matching model, cannot explain the magnitude of the business cycle fluctuations in two of its central elements, unemployment and vacancies. Modifying the model to make the present value of wages unresponsive to current labor market conditions amplifies fluctuations in unemployment and vacancies by an order of magnitude, significantly improving the performance of the model. Despite this, the welfare consequences of such rigid wages is negligible.

Suggested Citation

Shimer, Robert J., The Consequences of Rigid Wages in Search Models (February 2004). NBER Working Paper No. w10326, Available at SSRN: https://ssrn.com/abstract=509857

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