INFLATION AND WAGE RIGIDITY/FLEXIBILITY IN THE SHORT RUN

A recent literature uses accurate wage data from payroll records and provides compelling evidence against the conventional belief that nominal wages are downward sticky. This paper provides a unique contribution to this literature by conducting a formal analysis of the role of inflation in cyclical wage rigidity/flexibility. Analysis of payroll‐based wage data from the Korean labor market for the period 1971–2014 finds that the degree of downward nominal wage flexibility is countercyclical, and the countercyclicality becomes stronger during a deflationary, relative to inflationary, recession. This serves as a counter‐example to the conventional theory of cyclical wage rigidity. (JEL E24, E32, J30, J64)     

LABOR MARKET DYNAMICS WITH SEARCH FRICTIONS AND FAIR WAGE CONSIDERATIONS

Fairness considerations in wage setting can improve the ability of the Diamond‐Mortensen‐Pissarides search and matching model to account for U.S. labor market dynamics. Firms' production is influenced by workers' effort input, which depends on whether workers consider the employment relation as fair. A typical worker's effort is determined in a comparison of individual current wage with wage norms, including the outside option, the individual past wage, and the wage level in the steady state. The fairness considerations in the search framework give rise to endogenous real wage rigidity, and realistic volatilities of unemployment, vacancies, and labor market tightness. (JEL E24, E32, J64)     

ESTIMATING A NEW KEYNESIAN PHILLIPS CURVE WITH A CORRECTED MEASURE OF REAL MARGINAL COST: EVIDENCE IN JAPAN

We estimate a New Keynesian Phillips curve (NKPC) in Japan, focusing on the measurement of real marginal cost (RMC). Especially, we correct labor share by taking account of two kinds of labor market frictions: (1) labor adjustment costs and (2) real wage rigidity. Our results show that the consideration of these labor market frictions greatly improves the fit of Japan's NKPC. Furthermore, if we additionally incorporate materials prices in the calculation of RMC then the fit of the NKPC is further improved. The conventional backward-looking component is no more needed to explain Japan's inflation dynamics if we use a corrected measure of RMC. (JEL E31)     

AN OPEN‐ECONOMY MODEL WITH MONEY,ENDOGENOUS SEARCH,AND HETEROGENEOUS FIRMS

This paper describes a new monetary open‐economy model where firms have market power due to search frictions in the goods market, and endogenous search effort by consumers mitigates this market power. The optimal inflation rate generally depends positively on the cost of search effort, the cost of firm entry, and the cost of trade. Higher inflation always improves a country's terms‐of‐trade against its trading partners. I also characterize a general class of matching processes which offer a novel approach to modeling firm sales. (JEL D43, E40, F12)     

INFLATION DYNAMICS AND SUBJECTIVE EXPECTATIONS IN THE UNITED STATES

We estimate a forward‐looking New Keynesian Phillips Curve (NKPC) for the United States using data from the Survey of Professional Forecasters as proxy for expected inflation. We obtain significant and plausible estimates for the structural parameters independently of whether we use the output gap or unit labor costs as a measure of marginal costs. Moreover, when estimating a Phillips curve where lagged inflation enters due to price indexation by nonreoptimizing firms, we obtain significant parameter estimates of the sign predicted by theory independently of the marginal cost measure used. (JEL E31)     

THE CREDIT‐CHANNEL TRANSMISSION MECHANISM AND THE NONLINEAR GROWTH AND WELFARE EFFECTS OF INFLATION AND TAXES

With the credit‐channel effect driven by the central bank's open market operations, this paper's model easily gives rise to the nonlinear inflation‐growth nexus, which is evidenced by a number of cross‐country empirical studies. The threshold level of the inflation rate is found to be lower when tax rates are higher. The presence of the credit‐channel effect also provides the rationale for setting positive (and smaller than 1) tax rates on consumption, labor income, and capital income. The optimal tax rates rise as the inflation target declines. Under a fiscal policy rule where labor and capital income taxes move proportionally to each other, the optimal capital income tax rate could be higher than the optimal labor income tax rate. Under a sufficiently large central bank balance sheet, the credit‐channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing. This provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets. (JEL E58, E62, O42)     

UNION POWER,COLLECTIVE BARGAINING,AND OPTIMAL MONETARY POLICY

We study Ramsey policies and optimal monetary policy rules in a dynamic New Keynesian model with unionized labor markets. Collective wage bargaining and unions' monopoly power amplify inefficient employment fluctuations. The optimal monetary policy must trade off between stabilizing inflation and reducing inefficient unemployment fluctuations induced by unions' monopoly power. In this context the monetary authority uses inflation as a tax on union rents and as a mean for indirect redistribution. Results are robust to the introduction of imperfect insurance on income shocks. The optimal monetary policy rule targets unemployment alongside inflation. (JEL E0, E4, E5, E6)     

The impact of deregulation on labor demand in class-I railroads

This paper examines the impact of the Staggers Rail Act of 1980 on labor demand in Class-I railroads during 1961–1990. The demand for labor is a function of output, hourly wage rates, a time trend, and a vector of interactive dummy variables. Since deregulation, the labor demand curve has shifted downward; wage elasticities have become more elastic, ranging from −0.668 in 1980 to −1.187 in 1990; output elasticities trended upward from 0.557 to 0.809; and the marginal product of labor rose from 3.421 to 5.296 during 1980–1990. These findings suggest that unions’ bargaining power has declined, that the total wage bill is likely to decrease if the real wage rate rises further, and that cost savings and efficiency gains are realized through increases in the marginal product of labor. We thank an anonymous referee and Henry McFarland for insightful comments and assistance.     

STICKY PRICE AND STICKY INFORMATION PRICE‐SETTING MODELS: WHAT IS THE DIFFERENCE?

Using a partial equilibrium framework, Mankiw and Reis show that a sticky information model can generate a lagged and gradual inflation response after a monetary policy shock, whereas a sticky price model cannot. Our study demonstrates that the finding is sensitive to their model's parameterization. To determine a plausible parameterization, we specify a general equilibrium model with sticky information. In that model, we find that inflation peaks only one period after a monetary disturbance. A sensitivity analysis of our results reveals that the inflation peak is delayed by including real rigidities when the monetary policy instrument is money growth, whereas inflation peaks immediately when the policy instrument is the nominal interest rate. ( JEL E31, E32, E52)     

THE IMPACT OF LABOR CONTRACTS: EVIDENCE FROM BRAZIL

The conventional Keynesian model suggests that frictions created by nominal wage contracts generate a positive relationship between inflation and output. On the other hand, the New Classical/Real Business Cycle theory claims that firms and workers base their employment behavior, and hence output, on the marginal product of labor ignoring the efficiencies of fixed nominal wage contracts. Using Brazilian data, where nominal wages were indexed by law, tests show that fixed nominal wage contracts insignificantly affected output. Thus, the data support the view that fixed nominal wages play an insignificant role in determining the evolution of output. ( JEL E31)     

Household job search: A theoretical and empirical model

This article links the literature on family decision making and the economics of job search by examining job search by an unemployed individual within a household context. A theoretical model was developed which demonstrates the interdependence of the utility of household members when one is searching for work. The costs of search are borne by all household members while the benefits are captured in the searcher's expected future wage. A reservation wage was shown to be determined by household financing options, and the perception of relevant labor market parameters. An empirical model of the reservation wage for a sample of unemployment insurance recipients was estimated using two-stage least squares. Results, reported for male and female subgroups, support the hypotheses derived from the household job search model. In particular, the reservation wage was shown to depend on unemployment duration, labor market conditions, increased labor force participation of other household members, use of household assets to finance search, existence of dependents, and unemployment insurance benefits.     

BUSINESS CYCLE FLUCTUATIONS WITH THE DIVISION OF PERMANENT AND TEMPORARY EMPLOYMENT

In the mainstream real business cycle (RBC) model, labor can be viewed as temporary employment since the firm's demand for labor behaves directly in response to stochastic productivity shocks in each period. This paper provides a tractable way of analyzing fluctuations in permanent and temporary employment over the business cycle, as well as the underlying driving forces. This inclusion of heterogeneity helps reconcile the RBC model with the U.S. data given that temporary employees in general only account for a small proportion of total private‐sector employment (about 2%–3%). We draw an explicit division between permanent and temporary employment and resort to this separation to account for stylized facts that characterize a two‐tier labor market. In particular, with regard to the U.S. labor market, our benchmark model can well explain the motivating facts: (1) temporary employment is much more volatile than permanent employment, (2) the share of temporary employment (the ratio of temporary to aggregate employment) exhibits strong pro‐cyclicality, (3) permanent employment lags by two quarters on average, and (4) the correlation between temporary employment and output is stronger than that involving the permanent counterpart. The quantitative analysis suggests that our proposed channels explain the main facts well and the model further provides plausible reasoning for a firm's labor hoarding. (JEL E24, E32)     

THE U.S. LABOR INCOME SHARE AND AUTOMATION SHOCKS

The causes and consequences of the 1964–2016 swings in the U.S. labor income share/labor share (LS) are parsed through the lens of a structural model estimated on aggregate and LS series jointly. Where conventional models fall short, the present model yields a counter-cyclical LS unconditionally and in response to demand and monetary policy shocks, as well as a small wage pro-cyclicality, via moderate wage indexation. Shifts in automation, workers' market power, investment efficiency, and the relative price of investment account for 54%, 24%, 6%, and 4% of LS fluctuations, respectively. Automation shocks explain the lion's share of the post-2007 cyclical LS tumble and 11% of output cycles, and generate a distinctive counter-cyclical labor response. (JEL E32, E25, E52)     

OUTPUT EFFECTS OF INFLATION WITH FIXED PRICE– AND QUANTITY–ADJUSTMENT COSTS

This article examines how the aggregate production varies with inflation when there are fixed price– and quantity–adjustment costs. It shows that such variation is determined by the elasticity of the firms’ marginal real revenue with respect to demand. The aggregate production decreases with inflation if this elasticity always exceeds minus unity, whereas the aggregate production increases with inflation if the elasticity is always less than minus unity. The aggregate production is independent of inflation in the special case that the elasticity always equals minus unity. The latter occurs if demand is derived from a log‐quadratic utility function. (JEL E31)     

SKILLED‐UNSKILLED WAGE INEQUALITY AND URBAN UNEMPLOYMENT

The impact of trade liberalization on the labor market in the North has drawn tremendous attention in the face of the growing skilled‐unskilled wage gap but in the South it has been somewhat neglected. One of the key structural differences between the North and the South is that the South experiences a pronounced rural‐urban migration in the presence of urban unemployment. We introduce this feature in the structure of a simple general equilibrium model to analyze the effects of trade liberalization and fragmentation on employment and the skilled‐unskilled wage differential in the South. In particular, we show that while fragmentation necessarily improves the unskilled wage and the skilled wage, more lucrative global opportunities for the skilled final product, in the absence of fragmentation, can reduce the rural wage and increase urban unemployment. The effect of fragmentation, ceteris paribus, on the skilled‐unskilled wage gap is sensitive to the degree of substitutability between land and unskilled labor. As such, fragmentation can magnify the increase in the skilled‐unskilled wage gap resulting from an improvement in the terms of trade. It is also shown that a technological progress in the intermediate goods sector increases the skilled‐unskilled wage gap and raises urban unemployment. (JEL F1, O1, F11, F12)     

Does International Outsourcing Really Lower Workers’ Income?

We analyze the impact of international outsourcing on income, if the domestic labor market is imperfect, i.e. there is a bilateral bargaining between a firm and a labor union. In our analysis we distinguish between the cases where the parties negotiate over the wage only and where they negotiate over both wage and profit sharing. We find in the first case that outsourcing has an ambiguous effect on the workers’ income, while it increases the workers’ income in the second case. For the optimal amount of international outsourcing, we find that, depending on the wage effect of outsourcing, in a pure wage bargaining system it can be higher or lower than the level where domestic and foreign marginal labor costs are the same. In contrast, in a wage and profit share bargaining system, the amount of outsourcing lies below this level.     

INFORMAL LABOR MARKETS AND ON‐THE‐JOB TRAINING: EVIDENCE FROM WAGE DATA

This study examines whether informal sector jobs are a source of training for young less‐educated workers. Controlling for worker and job characteristics, it is found that, in the early years of workers' careers in Mexico, wage growth in the informal sector is higher than in the formal sector. This result is consistent with general human capital investment on‐the‐job if the informal labor market is more competitive than the formal labor market due to frictions generated by labor regulations. (JEL O17, J24, J310)     

HEALTH CARE INFLATION AND ITS IMPLICATIONS FOR MONETARY POLICY

Motivated by recent findings on the cyclical movement of both health and health spending, we construct a general equilibrium model that distinguishes health care demand from the demand for other goods. Using this model, we are able to generate inflation dynamics and cyclicality of health that match the US data. When the model is subjected to an expansionary monetary policy shock, it yields different output and inflation responses compared with a two‐sector model with homogeneous demand. We show that the trade‐off between leisure and health spending plays an important role in model dynamics. The model further predicts different degrees of inflation stabilization across sectors when a shift in the monetary policy occurs. (JEL E52, E31, E32, I10)     

Minimum wages and the wessels effect in a monopsony model

The Wessels model suggests that firms respond to increases in the minimum wage rate by decreasing the level of fringe benefits — an action which produces an inefficiency effect that lowers workers’ utility and the supply of labor. Standard models of monopsony, however, argue that wage floors prevent the exercise of market power and increase employment. I show that wage floors, even with fringe benefit curtailment, may increase employment by lowering the marginal expense of labor. Employee utility and employment will rise somewhat but not as much had the firm acted competitively in setting both wages and fringes.     

THE RELATIVE STICKINESS OF WAGES AND PRICES

While many modern business cycle theories posit the existence of nominal wage and/or output price stickiness, their relative importance remains an unsettled issue. Using a structural VAR model, this paper exploits evidence on the behavior of real wages to assess the relative importance of these two sources of stickiness. The empirical results suggest that a positive shock to aggregate demand causes a significant temporary fall in real wages. This is taken as evidence that sticky wages have played a more important role than sticky prices in transmitting aggregate demand shocks to real economic activity in the post-war U.S. (JEL E32)