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Working Paper
Sticky Wages on the Layoff Margin
We design and field an innovative survey of unemployment insurance (UI) recipients that yields new insights about wage stickiness on the layoff margin. Most UI recipients express a willingness to accept wage cuts of 5-10 percent to save their jobs, and one-third would accept a 25 percent cut. Yet worker-employer discussions about cuts in pay, benefits, or hours in lieu of layoffs are exceedingly rare. When asked why employers don’t raise the possibility of job-preserving pay cuts, four-in-ten UI recipients don’t know. Sixteen percent say cuts would undermine morale or lead the best ...
Working Paper
Wage Adjustment in Efficient Long-Term Employment Relationships
We present a model in which efficient long-term employment relationships are sustained by wage adjustments prompted by shocks to idiosyncratic productivity and the arrival of outside job offers. In accordance with casual and formal evidence, these wage adjustments occur only sporadically, due to the presence of renegotiation costs. The model is amenable to analytical solution and yields new insights into a number of labor market phenomena, including: (1) key features of the empirical distributions of changes in pay among job stayers; (2) a property of near-“memorylessness” in wage ...
Working Paper
Trade, Relative Prices, and the Canadian Great Depression
Canadian GNP per capita fell by roughly a third between 1928 and 1933. Although the decline and the slow recovery of GNP resemble the American Great Depression, trade was more important in Canada, as exports and imports each accounted for roughly a quarter of Canadian GNP in 1928. The fall in the trade share of GNP of roughly 30 percent between 1928 and 1933 was accompanied by a decline of over 20 percent in the relative prices of exports and imports relative to nontraded goods. We develop a three-sector small open economy model, where wages in the nontraded and import competing sectors ...
Working Paper
Employment, Wages and Optimal Monetary Policy
We study optimal monetary policy when the empirical evidence leaves the policymaker uncertain whether the true data-generating process is given by a model with sticky wages or a model with search and matching frictions in the labor market. Unless the policymaker is almost certain about the search and matching model being the correct data-generating process, the policymaker chooses to stabilize wage inflation at the expense of price inflation, a policy resembling the policy that is optimal in the sticky wage model, regardless of the true model. This finding reflects the greater sensitivity of ...
Working Paper
Sticky Wages, Monetary Policy and Fiscal Policy Multipliers
This paper demonstrates how adding nominal wage rigidity to a standard sticky price model can create a mechanism by which increases in government spending cause increases in consumption. The increase in output arising from government purchases puts upward pressure on the price level. At a fixed short-run nominal wage, this bids down the real wage, which leads producers to increase labor demand. Increased labor demand allows households to both finance the tax bill associated with the government spending as well as increase their own consumption. Our approach does not rely upon existing ...