Working Paper No. 200

Search Theory, Downward Money Wage Rigidity and the Micro Foundations of the Phillips Curve

Published: December, 1988Pages: 26Keywords: Markov decision processes, Search theory, Wage Determination, Wage RigitidyJEL-codes: 022; 026

Search Theory, Downward Money Wage Rigidity and the Micro Foundations of the Phillips Curve Nils Henrik Schager


The present paper has two aims. The first one concerns primarily an issue of method. I set up and analyse an explicitly stochastic model of the optimal behaviour of a firm, which recruits from a search labour market. The second aim of my paper concerns very much an issue of substance in economics. I show that when the firm is not allowed to decrease its money wage, its optimal response to lower unemployment is to increase its wage, if a plausible (and testable) condition with regard to its expected horizon is met. Hence search theory predicts the existence of a micro Phillips relation under plausible assumptions.

 

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