Imperfectively Competitive Labor Markets and the Productivity Puzzle
University of Aarhus Economics Working Paper No. 1999-7
Posted: 19 Jul 1999
Date Written: 1999
Standard models of imperfectly competitive labor market predict that real wages are unaffected by productivity. This is in conflict with empirical evidence. We integrate imperfectly competitive labor markets in a fully specified dynamic macromodel. While temporary shocks are consistent with the business cycle fact of little real wage and large employment responsiveness, we find in accordance with empirical evidence that permanent productivity changes affect real wages and not employment. Hence, the model solves the productivity puzzle and is capable of matching both business cycle and long-run facts concerning movements of real wages and employment.
JEL Classification: E32, J31, J51
Suggested Citation: Suggested Citation