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NBB Conference
Nominal Wage Rigdities in a
New Keynesian Model with Frictional Unemployment
byBodart, de Walque, Pierrard, Sneessens, Wouters
(UCL, NBB and BCL)
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Starting point full-fledged DGSE NKM (Smets-Wouters (2003))
Objective better labor market representation labor market flows and tensions; Beveridge curve hours of work vs (un-)employment reexamine interactions nominal – real
rigidities
Motivation
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
negative correlation u-v ( -0.95)
volatility of u and v (>5.0)
real wage smooth (.5) slightly procyclical (.5)
positive correlation job finding rate-tensions
Some stylized facts
Natural candidate:
search model à la Mortensen-Pissarides
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Back to an old problem…
wages
total hours of work
B
A
C
(Hall( 2003), Shimer (2004))
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
vacancies
unemployment
A
B
Beveridge Curve (Shimer (2005))
two issues:volatility, correlation
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Merz (1995), Andolfatto (1996), Hall (2003), Shimer (2004)
(critique of standard Nash bargaining) Bodart-Pierrard-Sneessens (2005)
Calvo wage contracts (old and new jobs)
Gertler-Trigari (2006)(large firms, quadratic labor adjustment
costs)
this paper (full-fledged DSGE)
(Some) Related Contributions
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Krause-Lubik (2003) (endo wage « rigidity » via on-the-job
search) Trigari (2004)
(wage-hours bargaining; endo job destruction)
Christoffel-Kuester-Linzert (2005) (wage adj costs; sunk vacancy cost)
Fujita-Ramey (2005) (sunk vacancy costs)
Kuester (2006) (« integrates » wage and price setting)
Alternative Routes
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
As close as possible to existing DSGE (Smets-Wouters (2003))
three types of firms sectors (retailers, intermediate, labor services)
real rigidities(monopolistic competition + labor search)
price and wage rigiditiesCalvo contracts (old and new jobs)
Modelling Strategy
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Model Ingredients
Consumers perfect insurance… decision 1: savings (with habit formation) decison 2: capital utilization rate decison 3: investment (capital adj. costs) resource constraint=
wage (fixed+variable) or unempl.benefit + return on capital and bonds + redistributed profits
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Firms Behavior
Final goods producers price takers on all markets inputs = differentiated intermediate goods perfectly competitive final goods market
Intermediate Goods Producers monopolistic competition price setters inputs = labor (hours*workers)+capital perfectly competitive input markets
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Prices and Wages
Price Setting Monopolistic competition Calvo contracts
firms with different sizes, identical technologies
Wage Setting One job-one firm setup (labor service firm) Nash bargaining, in Calvo framework Distinguihes old and new jobs Sluggish average wage
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Vacancy Costs and Free Entry Condition
A la Mortensen-Pissarides (MP) fixed recurrent cost a1
cost per hire = a1 * 1/q A la Gertler-Trigari (GT) variable recurrent cost such that… cost per hire = a2 * hiring rateA la Fujita-Ramey (FR) sunk cost (heterogeneous across new entrants)
new entrants: « marginal » sunk cost = job value
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Evaluating the Model
Calibrationentirely based on « extraneous » information (empirical estimates, exit and entry probabilities)
Simulation of streamlined model (no « frictions » nor price rigidity)comparison with Gertler-Trigari (2006)
Simulation of full-fledged NKMlabor search vs monopolistic labor market
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Productivity Shock in Streamlined Model
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
16
de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Productivity Shock in Streamlined Model
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Productivity Shock in Streamlined Model
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Interest Rate Shock in Complete Model
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
All Three Shocks in Complete Model
Three types of shocks
- productivity
- interest rate
- public expenditures
Assumed not to be correlated
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
All Three Shocks in Complete Model
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
Conclusions
Does as well as MC model on traditional variables; needs fine tuning of calibration estimation
Reproduces fairly well the cyclical properties of key labor market variables
Some weak points remain : hours of work, inflation response
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de Walque et al. New Keynesian Model with Frictional Unemployment
______________________________________________________________________________________________________NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006
vacancy cost and free entry condition extensive vs intensive margin bargaining and overtime compensation articulation wage-price decision endogenous separation
Further research…
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