nr 068 - Calvo Wages in a Search Unemployment Model

DNB Working Papers
Date 13 December 2005

RBC models with search unemployment and wage renegotiation generate too much wage volatility and too stable unemployment rate. Shimer (2004) shows that it is possible to reproduce a volatility of unemployment similar to that observed in actual economies by imposing full real wage rigidity. We use a similar model but with Calvo wage contracts. The models with full wage flexibility or full wage rigidity are obtained as particular cases. We show that a contract length of about six quarters fits best the observed cyclical properties of wages and unemployment. Keywords: search unemployment, Calvo wage, cyclical properties. JEL classification: E24, E32, J30, J41.