Aggregate wage rigidity is a primary driver of employment volatility over the business cycle
Economic literature and theoretical models support the view that downward wage rigidities contribute significantly to employment fluctuations and unemployment volatility over the business cycle.
The retrieved papers provide theoretical models and empirical evidence documenting the existence of downward nominal wage rigidity and demonstrating its substantial impact on employment and unemployment volatility, particularly during downturns.
Steinar Holden, Fredrik Wulfsberg. Downward Nominal Wage Rigidity in Europe. 2004. https://doi.org/10.2139/ssrn.540023
Paper 0 documents the prevalence of downward nominal wage rigidity across European countries and sectors.
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Wang Y. Wage Commitments, Financial Frictions, and Unemployment. 2022. https://doi.org/10.2139/ssrn.4110474
Paper 4 demonstrates how wage commitments and rigidities interact with financial frictions to significantly increase unemployment volatility.
Jonathan P. Thomas. Fair Pay and a Wagebill Argument for Wage Rigidity and Excessive Employment Variability. 2000. https://doi.org/10.2139/ssrn.239808
Paper 9 shows theoretically that wage rigidities lead to inefficient employment levels and excessive employment variability in bad states of the world.
Emrehan Aktug. Downward nominal wage rigidity and the optimal inflation target. 2025. https://doi.org/10.1017/s1365100525000264
Paper 10 highlights how downward nominal wage rigidity has a substantial impact on macroeconomic outcomes and the distribution of wage changes.
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