Business Cycles , Wage Stickiness and Labor Market Disequilibrium

Real Business Cycles are often studied in the context of the general equlibrium framework with competitive markets, flexible wages and prices. This restricts the effective application of intertemporal models to the real world business cycles. Stickiness of wages and prices have been considered in recent monopolistic competition models. In this paper, we go a step further and separate labor supply and labor demand and allow for different variants of nonclearing labor markets. Calibration for U.S. economy shows that such model variants will produce a higher volatility in employment and a more realistic correlation between consumption and employment and thus fit the data significantly better than the standard model.