Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 200: Search Theory, Downward Money Wage Rigidity and the Micro Foundations of the Phillips Curve

Nils Henrik Schager
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Nils Henrik Schager: Research Institute of Industrial Economics (IFN)

Abstract: The present paper has two aims. The first one concerns primarily an issue of method. I set up and analyse an explicitly stochastic model of the optimal behaviour of a firm, which recruits from a search labour market. The second aim of my paper concerns very much an issue of substance in economics. I show that when the firm is not allowed to decrease its money wage, its optimal response to lower unemployment is to increase its wage, if a plausible (and testable) condition with regard to its expected horizon is met. Hence search theory predicts the existence of a micro Phillips relation under plausible assumptions.

Keywords: Wage rigidity; job search; phillips curve; optimal firm behaviour

JEL-codes: J23; J31; J62

26 pages, December 1988

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