Full Citation

Title: Hysteresis via Endogenous Rigidity in Wages and Participation

Citation Type: Working Paper

Publication Year: 2017

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Abstract: We model hysteresis in the labor market as resulting from a strategic complementarity in firms wage setting and workers job search strategies. Strategic complementarity results in a continuum of possible equilibria with higher-wage equilibria welfare dominating lower-wage equilibria. Further, we specify a protocol for revelation of the new equilibria following shocks such that the model exhibits (1) periods of endogenous rigidity in wages and participation, (2) persistent changes in wages, participation, and output in response to transitory movements in labor productivity, (3) sluggish recoveries including both a jobless phase and a wageless phase. Furthermore, regardless of the history, expansions are insufficiently robust in the sense that misallocation remains even during expansions.

Url: https://www.federalreserve.gov/econres/feds/files/2017044pap.pdf

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Authors: Doniger, Cynthia L; Lopez-Salido, David

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Publication Number: 2017-044

Institution: Federal Reserve Board

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Publisher Location: Washington, D.C.

Data Collections: IPUMS CPS

Topics: Labor Force and Occupational Structure

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