Incomplete Capital Markets, Wage Formation and Stabilization Policy

CES Working Paper at Univ. of Munich No. 123

Posted: 5 Feb 1997

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: December 1996

Abstract

The future purchasing power of wage income may become risky in the presence of capital market imperfections. Current nominal wages, therefore, have intertemporal implications which in turn affect wage determination. The influence of consumption risk on wage setting is analyzed in a general equilibrium model with an imperfectly competitive labor market (monopoly union). It is shown that the adjustment process implies wage smoothing and nominal rigidities. Nominal wages are less flexible than prices, and there is more persistency in wage than in price adjustment. Moreover, employment shows more variability over the business cycle than real wages no matter whether the cycle is driven by supply or demand shocks. An active demand management policy is shown to affect risk and, therefore, real allocations and to be potentially Pareto improving.

JEL Classification: E30, J30

Suggested Citation

Andersen, Torben M., Incomplete Capital Markets, Wage Formation and Stabilization Policy (December 1996). CES Working Paper at Univ. of Munich No. 123, Available at SSRN: https://ssrn.com/abstract=3694

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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