The Role of Real Wage Rigidity and Labor Market Frictions for Inflation Persistence

Authors


  • We thank Heinz Herrmann, Andrew Levin, Michael Krause, Keith Küster, and seminar participants at the Goethe-University Frankfurt, the Deutsche Bundesbank, and the Eurosystem’s Inflation Persistence Network for helpful comments and suggestions. Part of this research was undertaken while both authors were affiliated with the Deutsche Bundesbank and the Goethe-University Frankfurt. The views expressed in this note are those of the authors and do not necessarily reflect those of the ECB or Bundesbank. Any remaining errors are the sole responsibility of the authors.

Abstract

We analyze the transmission mechanism of wages to inflation within a New Keynesian business cycle model with wage rigidities and labor market frictions. Our main focus is on the channel of real wage rigidities on inflation persistence for which we find the specification of the wage bargaining process to be of crucial importance. Under the standard efficient Nash bargaining, the feedback of wage rigidities on inflation is ambiguous and depends on other labor market variables. However, under the alternative right-to-manage bargaining we find that more rigid wages translate directly into more persistent movements of aggregate inflation.

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