Macroeconomic Dynamics with Rigid Wage Contracts

We adapt the wage contracting structure in Chari (1983) to a dynamic, balanced-growth setting with re-contracting à la Calvo (1983). The resulting wage-rigidity framework delivers a model very similar to that in Jaimovich and Rebelo (2009), with their habit parameter replaced by our probability of wage-contract resetting. That is, if wage contracts can be reset very frequently, labor supply behaves in accordance with King, Plosser, and Rebelo (1988) preferences, whereas if they are sticky for a long time, we obtain the setting in Greenwood, Hercowitz, and Huffman (1988), thus allowing significant responses of hours to wage changes.