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  3. American Economic Journal: Macroeconomics
  4. January 2022
  5. How Sticky Wages in Existing Jobs Can Affect Hiring

How Sticky Wages in Existing Jobs Can Affect Hiring

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Abstract

We consider a matching model of employment with flexible wages for new hires but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort's response can greatly increase wage inertia.

Citation

Bils, Mark, Yongsung Chang, and Sun-Bin Kim. 2022. "How Sticky Wages in Existing Jobs Can Affect Hiring." American Economic Journal: Macroeconomics, 14 (1): 1-37. DOI: 10.1257/mac.20190338

Additional Materials

JEL Classification

  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • J23 Labor Demand
  • J31 Wage Level and Structure; Wage Differentials
  • J41 Labor Contracts
  • M51 Personnel Economics: Firm Employment Decisions; Promotions
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