Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/272748 
Year of Publication: 
2023
Series/Report no.: 
IZA Discussion Papers No. 16121
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We develop a theory of labor markets in a monetary economy with four realistic features: search frictions, worker productivity shocks, wage rigidity, and two-sided lack of commitment. Due to the non-Coasean nature of labor contracts, inefficient job separations occur in the form of endogenous quits and layoffs that are unilaterally initiated whenever a worker's wage-to-productivity ratio moves outside an inaction region. We derive sufficient statistics for the aggregate labor market response to a monetary shock based on the distribution of workers' wage-to-productivity ratios. These statistics crucially depend on the incidence of inefficient job separations, which we show how to identify using readily available microdata on wage changes and worker flows between jobs.
Subjects: 
inflation
monetary policy
wage rigidity
wage inequality
unemployment
inefficient job separations
quits
layoffs
directed search
commitment
stopping times
continuous-time methods
variational inequalities
JEL: 
E12
E31
D31
Document Type: 
Working Paper

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