Research Seminar: Equilibrium Wage Rigidity in Directed Search
Speaker: Jaehong Kim, PhD (Chapman University)
Title: Equilibrium Wage Rigidity in Directed Search
Abstract: Matching frictions and downward wage rigidity emerge as equilibrium phenomena in a two-sided labor market where firms must negotiate wage cuts. Firms post wages to attract workers and matches are endogenous. Negotiating a wage cut is costly to the firm, where the cost is proportional to the size of the proposed cut. Shocks to the firm’s profitability may yield an equilibrium wage above what the firm would offer absent negotiation costs. Wage cuts can be partial or full, immediate or delayed, and are non-linear in the shock size. Importantly, wages are sticky even if negotiating a wage cut has negligible costs.