Intertemporal Wage Smoothing
Posted: 10 Oct 1998
Capital market imperfections make the future purchasing power of wage income risky. Therefore, current nominal wages may have intertemporal implications which affect wage determination. The influence of consumption risk on wage setting is analysed in a general equilibrium model with an imperfectly competitive labour market (monopoly union). It is shown that the adjustment process implies wage smoothing which causes nominal wages to be less flexible than prices, and moreover employment shows more variability over the business cycle than real wages no matter whether the cycle is driven by real or nominal shocks.
JEL Classification: J39
Suggested Citation: Suggested Citation