A0656
Title: The Nash wage elasticity and its business cycle implications
Authors: Matthew Knowles - City, University of London (United Kingdom) [presenting]
Abstract: A new measure of wage rigidity, the Nash wage elasticity (NWE), is developed and used to evaluate the importance of wage rigidity for business cycles. The NWE is the percentage change in the actual wage rate when the wage that would occur under Nash bargaining changes by 1\%. It is shown that the NWE can be measured from aggregate data under relatively weak assumptions which hold across a large class of search and matching models. The empirical value can then be compared with the values predicted by specific models in this class. In the US data, the estimates of the NWE are generally between 0 and 0.1, indicating that, for both continuing workers and new hires, (a) there is a high degree of wage rigidity, and (b) Nash bargaining provides a poor description of wage setting. It is shown that the estimates imply that wage rigidity greatly amplifies business cycles: A simple SAM model suggests that if workers were paid Nash-bargained wages rather than actual wages, then the cyclical volatility of unemployment would decrease to less than one-seventh of what it is in the data. The results are compared to various models of rigid and flexible wages in the literature.
