How Sticky Wages in Existing Jobs Can Affect Hiring
We consider a matching model of employment with wages that are flexible for new hires, but sticky within matches. We depart from standard treatments of sticky wages by allowing effort to respond to the wage being too high or low. Shimer (2004) and others have illustrated that employment in the Mortensen-Pissarides model does not depend on the degree of wage flexibility in existing matches. But this is not true in our model. If wages of matched workers are stuck too high in a recession, then firms will require more effort, lowering the value of additional labor and reducing new hiring.
We thank Corina Boar for her excellent research assistance. For helpful comments we especially thank Marianna Kudlyak and Jose Mustre-del-Rio. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.