Macroeconomic implications of Downward Wage Rigidities∗

Growth of unemployment, employment, vacancies and wages exhibit strong asymmetries between expansionary and contractionary phases of the business cycle. This is also very apparent during the crisis of 2008-2009 for the US and European countries. In this paper we analyse to what degree downward wage rigidities in the bargaining process affect other variables of the labour market, output, inflation and monetary policy. For this we introduce downward wage rigidities in a monetary DSGE model with search and matching frictions in the labor market. We find that the presence of downward wage rigidities triggers substantial asymmetries for all labour market variables and is also transmitted to investment, output and inflation. During booms wages increase easily limiting in this way vacancy posting and employment creation. Labour costs grow due to the rise in wages and this transmits to price setting and inflation. During contractions nominal wages decrease slowly, shifting the burden of adjustment to employment and hours worked, whereas the reaction of inflation is smaller. The introduced asymmetry also helps to explain the asymmetric business cycle of many OECD countries where long and smooth expansions with low growth rates are followed by sharp but short recessions with large negative rates. JEL classification: E31; E52; C61.