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Strategic wage bargaining, labor market volatility, and persistence

  • Matthias Sebastian Hertweck EMAIL logo
Veröffentlicht/Copyright: 12. Oktober 2013
The B.E. Journal of Macroeconomics
Aus der Zeitschrift The B.E. Journal of Macroeconomics Band 13 Heft 1

Abstract

The textbook search and matching model suffers from too little amplification and weak internal propagation. We argue that the double failure is due to two negative feedback channels. Intuitively, a decline (rise) in unemployment (vacancies) rises both the wage rate, the “wage channel,” and the effective cost to fill a vacancy, the “hiring cost channel.” Therefore, we introduce hiring costs and strategic wage bargaining. The interaction between these two modifications limits the impact of both channels effectively and persistently. Thus, the modified model is able to closely match the (inversely) u-shaped impulse responses of vacancies and unemployment.

Keywords: hiring costs; matching; strategic bargaining; vacancy persistence
Corresponding author: Matthias Sebastian Hertweck, University of Konstanz, Department of Economics, Box 145, 78457 Konstanz, Germany, e-mail:

This paper is based on Chapter 1 of my doctoral dissertation written at the European University Institute. I am indebted to Morten Ravn and Salvador Ortigueira for their help and supervision. I would like to thank Árpád Ábrahám, Federico Di Pace, Christopher L. Foote, Maren Frömel, Ghalib Minhas, Leo Kaas, Georgi Kocharkov and two anonymous referees for their helpful comments and suggestions. I am also very grateful to Renato Faccini, Marcus Hagedorn, Jean-Olivier Hairault, Antonella Trigari, Christoph Winter, as well as conference participants at VfS 2006 (Bayreuth), EBIM 2006 (Bielefeld), RES 2007 (Warwick), SOLE 2007 (Chicago), and seminar audiences at the University of Osnabrück, the Kiel Institute for the World Economy, the University of Basel, the Paris School of Economics, the European Central Bank, the University of Oxford, and the Bank of England for providing feedback on an earlier version of this paper. All remaining errors are mine.

  1. 1

    The debate was sparked by the influential paper of Shimer (2005). For an overview on the debate, see the handbook chapter by Rogerson and Shimer (2011), as well as the references therein.

  2. 2

    Two of the exceptions are Fujita and Ramey (2009), who introduce a sunk cost for vacancy creation, which implies that vacancies become a predetermined state variable; and Coles and Moghaddasi Kelishomi (2011), who introduce a time-to-build constraint for vacancies.

  3. 3

    In an independent line of research, Christiano, Eichenbaum, and Trabandt (2013) estimate a New Keynesian DSGE model with strategic wage bargaining and hiring costs subject to permanent neutral technology shocks (among other shocks). They find that, in their model, the impact of the two modifications on the responses of vacancies and unemployment is quantitative, not qualitative and quantitative (as in our model).

  4. 4

    In the US, most of the cyclical volatility in unemployment is due to job creation rather than job separation. The estimates range from 60% (Fujita and Ramey 2009) to 80% (Shimer 2012). Thus, for simplicity, we assume that all separations are exogenous.

  5. 5

    King and Thomas (2006) show how the evidence of partial adjustment at the aggregate level can be reconciled with the fact that hiring behavior at the firm level is rather discrete and occasional.

  6. 6

    Note that, compared to the original large-firm version (Gertler and Trigari 2009), the expression is absent, which represents the negative impact of current hiring activities on future hiring costs. Quantitatively, however, the expression is small and, therefore, not important for the dynamics of the model. Further robustness checks following Krause and Lubik (2007) indicate that, under the maintained constant returns to scale assumption, the same conclusion holds true if we allow for intra-firm bargaining (Cahuc, Marque, and Wasmer 2008).

  7. 7

    In order to keep the model as simple as possible, our approach differs from Hall and Milgrom (2008) in that they assume that each firm-worker pair perceives a low risk of bargaining breakdown.

  8. 8

    This bargaining protocol constitutes probably the most common form of wage stickiness in the literature. See, for instance, Thomas (2008) or Christoffel et al. (2009). Following Christoffel and Kuester (2008), we introduce staggered wage contracts into a one-firm-one-worker matching model (as in Di Pace and Hertweck 2012). Note that, in comparison to the original large-firm version (Gertler and Trigari 2009), the “horizon effect” is absent in our model.

  9. 9

    We do not attempt to match the impulse response of the average real wage rate with its model generated counterpart. Due to composition effects, the average real wage rate is substantially less cyclical than individual wages (see, e.g., Solon, Barsky, and Parker 1994 or Lemieux 2006).

  10. 10

    Output per person is taken from the BLS (Series ID: PRS84006163), the civilian unemployment rate is taken from FRED (Series ID: UNRATE). The vacancy rate is defined as the ratio between the composite Help Wanted Index (Barnichon 2010) and the civilian labor force (FRED Series ID: CLF16OV). Prior to 1995Q1, the composite Help-Wanted index is identical to the original Help-Wanted Advertising Index. As of 1995Q1, the index is adjusted for the increasing importance of online advertising.

  11. 11

    The description of the structural VAR follows Ravn and Simonelli (2007).

  12. 12

    The shape of the impulse responses is robust across various specifications. In particular, we obtain very similar results when we estimate the VAR without a linear trend and output per worker in first differences. Table (2) additionally shows the estimated parameters of our model when the VAR order is set to M=3.

  13. 13

    The model generated impulse responses are computed using the Toolkit by Uhlig (1999) and the Makesysmat add-on by Martin Schneider. The add-on to match empirical impulse responses with their model generated counterparts was kindly shared by Georg Duernecker, which is gratefully acknowledged.

  14. 14

    See Section (A.2) in the Appendix for the log-linearized version of the model.

  15. 15

    To be precise, the black dashed line represents the response of the Nash wage under staggered Nash bargaining; i.e., the wage paid to workers in matches that are able to renegotiate. The black solid line represents the hypothetical response under strategic wage bargaining; i.e., the wage implied by Equation (12), given the same aggregate fluctuations as under staggered Nash bargaining.

  16. 16

    See Shimer (2004), who discusses the argument developed by Boldrin and Horvath (1995) in the context of a search and matching model.

  17. 17

    Instead, previous literature has focused on the cyclicality of wages of job changers; i.e., workers coming from both non-employment and employment (see the survey provided by Pissarides 2009). Haefke et al. (2012), however, argue that for a standard model without on-the-job search the elasticity of wages of new hires from non-employment is the relevant empirical target.

  18. 18

    Kudlyak (2013) develops a very similar theoretical argument as Haefke et al. (2012). However, using panel data from the NLSY, she estimates that the productivity elasticity of the expected present value of wage payments at the start of the match is even larger than one. Based on this estimate, she concludes that the unemployment volatility puzzle cannot be solved by wage formation.

  19. 19

    See Section (A.3) in the Appendix for the log-linearized version of the model.

  20. 20

    The proportionality assumption between effective hiring costs and labor market tightness has also been questioned by Pissarides (2009). Instead, he suggests to introduce a fixed matching cost in addition to the vacancy posting cost.

  21. 21

    Note that this effect is reinforced by the fact that the lower elasticity of the effective hiring cost dampens the elasticity of the wage rate, too (see Section 2.4.4).

Appendix A

In the following, denotes the steady state value of variable at, and denotes the percentage deviation from its steady state.

A.1 Log-linearized benchmark model

A.2 Log-linearized model with staggered Nash bargaining

We replace Equations (23) and (25) by the following set of equations:

A.3 Log-linearized model with linear vacancy posting costs

We replace Equations (23), (25), and (26) by the following set of equations:

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Published Online: 2013-10-12
Published in Print: 2013-01-01

©2013 by Walter de Gruyter Berlin Boston

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  29. Business cycle dynamics across the US states
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  32. Productivity and resource misallocation in Latin America1)
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https://doi.org/10.1515/bejm-2012-0145
Schlagwörter für diesen Artikel
hiring costs; matching; strategic bargaining; vacancy persistence

Artikel in diesem Heft

  1. Masthead
  2. Masthead
  3. Advances
  4. How have global shocks impacted the real effective exchange rates of individual euro area countries since the euro’s creation?
  5. Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium
  6. Overeducation and skill-biased technical change
  7. Strategic wage bargaining, labor market volatility, and persistence
  8. Households’ uncertainty about Medicare policy
  9. Contributions
  10. Deconstructing shocks and persistence in OECD real exchange rates1)
  11. A contribution to the empirics of welfare growth
  12. Development accounting with wedges: the experience of six European countries
  13. Implementation cycles, growth and the labor market
  14. International technology adoption, R&D, and productivity growth
  15. Bequest taxes, donations, and house prices
  16. Business cycle accounting of the BRIC economies
  17. Privately optimal severance pay
  18. Small business loan guarantees as insurance against aggregate risks
  19. Output growth and unexpected government expenditures
  20. International business cycles and remittance flows
  21. Effects of productivity shocks on hours worked: UK evidence
  22. A prior predictive analysis of the effects of Loss Aversion/Narrow Framing in a macroeconomic model for asset pricing
  23. Exchange rate pass-through and fiscal multipliers
  24. Credit demand, credit supply, and economic activity
  25. Distortions, structural transformation and the Europe-US income gap
  26. Monetary policy shocks and real commodity prices
  27. Topics
  28. News-driven international business cycles
  29. Business cycle dynamics across the US states
  30. Required reserves as a credit policy tool
  31. The macroeconomic effects of the 35-h workweek regulation in France
  32. Productivity and resource misallocation in Latin America1)
  33. Information and communication technologies over the business cycle
  34. In search of lost time: the neoclassical synthesis
  35. Divorce laws and divorce rate in the US
  36. Is the “Great Recession” really so different from the past?
  37. Monetary business cycle accounting for Sweden
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