From the comments, on nominal wage stickiness

MR commentator Donald A. Coffin posts on the wage stickiness issue:

There is, as it turns out, some actual research on this issue in the job search literature. The bottom line is that reservation wages appear to fall relatively quickly with duration of unemployment. One common conclusion is that wage stickiness comes from the behavior of *employers.* Some citations:

“Reservation Wages, Offer Wages, and Unemployment Duration–Some New Empirical Evidence” The authors conclude that offer wages fall faster than do reservation wages (not that reservations wages do not fall).

“The Relationship Between Unemployment Spells and Reservation Wages as a Test of Search Theory,” by Stephen R. G. Jones, QJE, V. 104, N. 4, 1988. “…the main finding is that reservation wages play a significant role in the determination of duration.”

“Short-Run Equilibrium Dynamics of Unemployment, Vacancies, and Real Wages,” by C. A. Pissarides, AER, V. 75, N. 4, 1985.

“Efficiency Wage Models and Unemployment,: by J. L. Yellen, AER, V. 72, N2., 1984. The stickiness of wages is attributed to the reluctance of *employers* to reduce wages.

“Unemployment, Wage-Setting, and Insider-Outsider Relationships,” by A. Lindbeck, AER V. 76, N. 2, 1986. The stickiness of wages is again attributed to the reluctance of *employers* to reduce wages.

“Wage Dynamics: Reconciling Theory and Evidence,” by O. Blanchard and L. Katz, 1999. “In this paper, we ask whether one can reconcile the empirical evidence with theoretical wage relations. We reach three main conclusions. First, we derive the condition under which the two can indeed be reconciled. We show the constraints that such a condition imposes on the determinants of workers’ reservation wages as well as the relative importance of workers’ outside options as opposed to match specific productivity in wage determination. Second, in the light of this condition, we reinterpret the presence of an “error correction” term in macroeconomic wage relations for most European economies but not in the United States. Third, we show that whether this condition holds or not has important implications for the effects of a number of variables — from real interest rates to oil prices to payroll taxes — on the natural rate of unemployment.”

“An Empirical Test Job-Search Model, with a Test of the Constant Reservation-Wage Hypothesis,” N. Keifer and G. Neumann, JPE, V. 87, N. 1m 1979. “Reservation wages are found to decline significantly with duration.”

“An Econometric Analysis of Reservation Wages,” by T. Lancaster and A. Chesher, Econometrica, V. 51, N. 6, 1983. Their table A-IV clearly shows reservation wages falling with duration of unemployment, from 21.28 pounds per week for durations less than 13 weeks to 17,74 pounds per week for durations exceeding 52 weeks,

I could go on, but go to Google Scholar and search on “reservation wages and duration of unemployment” if you want more.

If the employers don’t want you at the high wage, and don’t want you at the low wage, what might your perceived MP be, temporarily or not?  Keep in mind, firms are flush with cash.


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