Allocative and Remitted Wages: New Facts and Challenges for Keynesian Models

Susanto Basu, Christopher L. House

NBER Working Paper No. 22279
Issued in May 2016, Revised in March 2017
NBER Program(s):Economic Fluctuations and Growth, Labor Studies, Monetary Economics

Modern monetary business-cycle models rely heavily on price and wage rigidity. While there is substantial evidence that prices do not adjust frequently, there is much less evidence on whether wage rigidity is an important feature of real world labor markets. While real average hourly earnings are not particularly cyclical, and do not react significantly to monetary policy shocks, systematic changes in the composition of employed workers and implicit contracts within employment arrangements make it difficult to draw strong conclusions about the importance of wage rigidity. We augment a workhorse monetary DSGE model by allowing for endogenous changes in the composition of workers and also by explicitly allowing for a difference between allocative wages and remitted wages. Using both individual-level and aggregate data, we study and extend the available evidence on the cyclicality of wages and we pay particular attention to the response of wages to identified monetary policy shocks. Our analysis suggests several broad conclusions: (i) in the data, composition bias plays a modest but noticeable role in cyclical compensation patterns; (ii) empirically, both the wages for newly hired workers and the "user cost of labor" respond strongly to identified monetary policy innovations; (iii) a model with implicit contracts between workers and firms and a flexible allocative wage replicates these patterns well. We conclude that price rigidity likely plays a substantially more important role than wage rigidity in governing economic fluctuations.

download in pdf format
   (892 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22279

Users who downloaded this paper also downloaded* these:
Mian and Sufi w22256 Who Bears the Cost of Recessions? The Role of House Prices and Household Debt
Hamilton w21863 Macroeconomic Regimes and Regime Shifts
Bordo and Meissner w22059 Fiscal and Financial Crises
Jones w21142 The Facts of Economic Growth
Taylor w22356 The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us