NBB Conference
Nominal Wage Rigdities
in a
New Keynesian Model
with Frictional Unemployment
by
Bodart, de Walque, Pierrard, Sneessens, Wouters
(UCL, NBB and BCL)
1
de Walque et al.
New Keynesian Model with Frictional Unemployment
Motivation
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
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NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
2
de Walque et al.
New Keynesian Model with Frictional Unemployment
Some stylized facts
 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
Natural candidate:
search model à la Mortensen-Pissarides
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
3
de Walque et al.
New Keynesian Model with Frictional Unemployment
Back to an old problem…
(Hall( 2003), Shimer (2004))
wages
C
B
A


total hours of work
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
4
de Walque et al.
New Keynesian Model with Frictional Unemployment
Beveridge Curve (Shimer (2005))
vacancies
two issues:
volatility, correlation
A
B

unemployment
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
5
de Walque et al.
New Keynesian Model with Frictional Unemployment
(Some) Related Contributions
 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)
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
6
de Walque et al.
New Keynesian Model with Frictional Unemployment
Alternative Routes
 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)
 Kuester (2006)
(sunk vacancy costs)
(« integrates » wage and price setting)
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
7
de Walque et al.
New Keynesian Model with Frictional Unemployment
Modelling Strategy
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 rigidities
Calvo contracts (old and new jobs)
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
8
de Walque et al.
New Keynesian Model with Frictional Unemployment
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
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
9
de Walque et al.
New Keynesian Model with Frictional Unemployment
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
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
10
de Walque et al.
New Keynesian Model with Frictional Unemployment
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
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
11
de Walque et al.
New Keynesian Model with Frictional Unemployment
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 rate
A la Fujita-Ramey (FR)
 sunk cost (heterogeneous across new entrants)
  new entrants: « marginal » sunk cost = job value
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
12
de Walque et al.
New Keynesian Model with Frictional Unemployment
Evaluating the Model
 Calibration
entirely 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 NKM
labor search vs monopolistic labor market
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
13
de Walque et al.
New Keynesian Model with Frictional Unemployment
Productivity Shock in Streamlined Model
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
14
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
15
de Walque et al.
New Keynesian Model with Frictional Unemployment
Productivity Shock in Streamlined Model
______________________________________________________________________________________________________
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
Productivity Shock in Streamlined Model
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
17
de Walque et al.
New Keynesian Model with Frictional Unemployment
Interest Rate Shock in Complete Model
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
18
de Walque et al.
New Keynesian Model with Frictional Unemployment
All Three Shocks in Complete Model
Three types of shocks
- productivity
- interest rate
- public expenditures
Assumed not to be correlated
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
19
de Walque et al.
New Keynesian Model with Frictional Unemployment
All Three Shocks in Complete Model
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
20
de Walque et al.
New Keynesian Model with Frictional Unemployment
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
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
21
de Walque et al.
New Keynesian Model with Frictional Unemployment
Further research…





vacancy cost and free entry condition
extensive vs intensive margin
bargaining and overtime compensation
articulation wage-price decision
endogenous separation
______________________________________________________________________________________________________
NBB Conference on « Price and Wage Rigidities in an Open Economy »
12-13 October 2006
22