1. 1 NBB Conference Nominal Wage Rigdities in a New Keynesian Model with Frictional Unemployment by Bodart, de Walque, Pierrard, Sneessens, Wouters (UCL, NBB and BCL)

2. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 2 Starting point full-fledged DGSE NKM (Smets-Wouters (2003)) Objective better labor market representation labor market flows and tensions; Beveridge curve hours of work vs (un-)employment reexamine interactions nominal – real rigidities Motivation

3. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 3 negative correlation u-v ( -0.95) volatility of u and v (>5.0) real wage smooth (.5) slightly procyclical (.5) positive correlation job finding rate-tensions Some stylized facts Natural candidate: search model à la Mortensen-Pissarides

4. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 4 Back to an old problem… wages total hours of work B A C (Hall( 2003), Shimer (2004))

5. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 5 vacancies unemployment A B Beveridge Curve ( Shimer (2005) ) two issues: volatility, correlation

6. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 6 Merz (1995), Andolfatto (1996), Hall (2003), Shimer (2004) (critique of standard Nash bargaining) Bodart-Pierrard-Sneessens (2005) Calvo wage contracts (old and new jobs) Gertler-Trigari (2006) (large firms, quadratic labor adjustment costs) this paper (full-fledged DSGE) (Some) Related Contributions

7. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 7 Krause-Lubik (2003) (endo wage « rigidity » via on-the-job search) Trigari (2004) (wage-hours bargaining; endo job destruction) Christoffel-Kuester-Linzert (2005) (wage adj costs; sunk vacancy cost) Fujita-Ramey (2005) (sunk vacancy costs) Kuester (2006) (« integrates » wage and price setting) Alternative Routes

8. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 8 As close as possible to existing DSGE (Smets-Wouters (2003)) three types of firms sectors (retailers, intermediate, labor services) real rigidities ( monopolistic competition + labor search) price and wage rigidities Calvo contracts (old and new jobs) Modelling Strategy

9. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 9 Model Ingredients Consumers perfect insurance… decision 1: savings (with habit formation) decison 2: capital utilization rate decison 3: investment (capital adj. costs) resource constraint= wage (fixed+variable) or unempl.benefit + return on capital and bonds + redistributed profits

10. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 10 Firms Behavior Final goods producers price takers on all markets inputs = differentiated intermediate goods perfectly competitive final goods market Intermediate Goods Producers monopolistic competition price setters inputs = labor (hours*workers)+capital perfectly competitive input markets

11. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 11 Prices and Wages Price Setting Monopolistic competition Calvo contracts firms with different sizes, identical technologies Wage Setting One job-one firm setup (labor service firm) Nash bargaining, in Calvo framework Distinguihes old and new jobs Sluggish average wage

12. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 12 Vacancy Costs and Free Entry Condition A la Mortensen-Pissarides (MP) fixed recurrent cost a 1 cost per hire = a 1 * 1/q A la Gertler-Trigari (GT) variable recurrent cost such that… cost per hire = a 2 * hiring rate A la Fujita-Ramey (FR) sunk cost (heterogeneous across new entrants) new entrants: « marginal » sunk cost = job value

13. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 13 Evaluating the Model Calibration entirely based on « extraneous » information (empirical estimates, exit and entry probabilities) Simulation of streamlined model (no « frictions » nor price rigidity) comparison with Gertler-Trigari (2006) Simulation of full-fledged NKM labor search vs monopolistic labor market

14. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 14 Productivity Shock in Streamlined Model

15. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 15

16. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 16 Productivity Shock in Streamlined Model

17. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 17 Productivity Shock in Streamlined Model

18. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 18 Interest Rate Shock in Complete Model

19. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 19 All Three Shocks in Complete Model Three types of shocks -productivity -interest rate -public expenditures Assumed not to be correlated

20. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 20 All Three Shocks in Complete Model

21. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 21 Conclusions Does as well as MC model on traditional variables; needs fine tuning of calibration estimation Reproduces fairly well the cyclical properties of key labor market variables Some weak points remain : hours of work, inflation response

22. de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » 12-13 October 2006 22 vacancy cost and free entry condition extensive vs intensive margin bargaining and overtime compensation articulation wage-price decision endogenous separation Further research…