The Labour Market in an Equilibrium Business Cycle Model

This paper extends the basic, multimarket model of Lucas (1972), to explicitly consider the labour market. It builds on an important distinction between the product wage, entering the decision function of firms, and the real wage, entering the decision function of workers. Because of the unobservability of the price level workers make forecasting errors in trying to calculate their real wage, despite having rational expectations. This gives rise to a Phillips curve. The major new result of the paper is the demonstration that wages are less variable than prices. which offers an equilibrium interpretation of wage stickiness.

Journal of Monetary Economics

Full Article PDF

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s