Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2016:12: Endogenous Separations, Wage Rigidities and Employment Volatility

Mikael Carlsson () and Andreas Westermark ()
Additional contact information
Mikael Carlsson: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Andreas Westermark: Sveriges Riksbank, Postal: Research Department, , SE-103 37, Stockholm, Sweden

Abstract: We show that in micro data, as well as in a search and matching model with endogenous separations and rigid wages, separations and hence employment volatility are non-neutral to wage rigidities of incumbent workers. In contrast to when all wages are flexible, the standard deviation of unemployment in a model with rigid wages for incumbent workers (only) matches the standard deviation in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes in this class of models.

Keywords: Search and matching; Unemployment volatility puzzle; Wage rigidities; Job De-struction

JEL-codes: E30; J63; J64

25 pages, August 30, 2016

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