تورم و بازبینی پویایی بازار کار

We demonstrate that the presence of an empirically plausible labor adjustment decision at the firm level rationalizes strategic complementarities in price-setting which help explain inflation dynamics. Those strategic complementarities are typically assumed away in the related existing literature. This motivates our revisiting of inflation and labor market dynamics.

Firms adjust labor both at the intensive and at the extensive margin (see, e.g., Hansen and Sargent, 1988). What does this imply for inflation dynamics? To address this question a New Keynesian model featuring two margins of labor adjustment is developed. A search and matching friction à la Mortensen and Pissarides (1994) gives rise to equilibrium unemployment and an employment adjustment cost allows us to obtain an empirically plausible split between the two margins of labor adjustment. Our focus is the role of labor market frictions per se for inflation dynamics.1 It is shown that plausible restrictions on employment adjustment rationalize strategic complementarities in price-setting which help explain inflation dynamics.2 Interestingly, the model also implies a reasonably volatile marginal cost schedule. The latter feature is empirically relevant (see, e.g., Bils, 1987) and hence an inconvenient fact for those models whose ability to generate persistent inflation dynamics relies on assumptions which guarantee a smooth marginal cost, as has been emphasized by Basu (2005). We therefore conclude that the discipline imposed by the labor market facts is of crucial importance for understanding inflation dynamics.

We try to understand the role of labor market frictions for inflation dynamics. To this end we develop a monetary model featuring two margins of labor adjustment as well as a simultaneous price-setting and employment decision at the firm level. It is shown that the presence of an empirically plausible labor adjustment decision at the firm level rationalizes strategic complementarities in price-setting which help explain inflation dynamics. Those strategic complementarities are typically assumed away in the related existing literature. In revisiting inflation and labor market dynamics our work does not only stress the importance of strategic complementarities but also shows how to model them in a tractable and, at the same time, empirically relevant way. It would, however, be interesting to investigate how those results are affected, if employment and price-setting are conducted in a state contingent fashion. In fact, the work by Dotsey and King (2005) and the related comment by Basu (2005) suggest that strategic complementarities could potentially play out in a different way under those circumstances. Clearly, this warrants future research.