1 NBB Conference Nominal Wage Rigdities in a New Keynesian Model with Frictional Unemployment by Bodart, de Walque, Pierrard, Sneessens, Wouters (UCL,

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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

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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

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…