Louis Phaneuf

Why Does the Cyclical Behavior of Real Wages Change Over Time

This paper seeks to understand the evolution of the cyclical behavior of U.S. real wage rates from the interwar period to the post World War II period using a dynamic general equilibrium model that emphasizes demand-driven business cycle fluctuations. In the model, changes in the cyclical behavior of real wages arise endogenously from the interactions between nominal wage and price rigidities and an evolving input-output structure.

Technology shocks and labor market dynamics: Some evidence and theory

A positive technology shock may lead to a rise or a fall in per capita hours, depending on how hours enter the empirical VAR model. We provide evidence that, independent of how hours enter the VAR, a positive technology shock leads to a weak response in nominal wage inflation, a modest decline in price inflation, and a modest rise in the real wage in the short-run and a permanent rise in the long-run. We then examine the ability of several competing theories to account for this VAR evidence. Our preferred model features sticky prices, sticky nominal wages, and habit formation. The same model also does well in accounting for the labor market evidence in the post-Volcker period.

The Welfare Cost of Nominal Wage Contracting

We use a dynamic general equilibrium model to obtain quantitative estimates of the welfare costs of nominal wage contracts. We find that the welfare costs of such contracts can vary quite a bit depending on the degree of indexation, the size and persistence of money supply uncertainty and the contract length. However, the size and persistence of the technology shocks do not affect the welfare costs very much. The welfare costs of nominal wage contracting depend also on the elasticity of labor supply. If the elasticity of labor supply is small, the welfare costs can be substantial. We also study how contract length might respond to changes in the environment. The results show that contract length may not be very sensitive to the size and the persistence of real and nominal shocks.

Price adjustment costs and the effect of endogenous technique on price stickiness

Abstract This paper analyzes a monopolistic firms pricing and choice of technique decisions, when it faces a random demand and must incur a fixed menu cost to adjust its price to demand shocks. We show that price adjustment costs have the same effect as an increase in the variability of demand, in that the firm will choose a technique yielding a flatter short-term marginal cost curve. Making the production technique endogenous widens the range of demand shifts that will be accommodated with an unchanged price; it allows for less price variation and more quantity variation when it is profitable to pay the menu cost and adjust the price.

Wage contracts and business cycle models

Abstract The paper introduces an explicit production technology into a business cycle model with nominal rigidities and evaluates the modified model using criteria similar to those commonly used to assess real business cycle (RBC) models. In general, the model compares favorably to standard RBC models, and is superior in several important respects. It reproduces the observed correlation of average labor productivity and hours as well as the relative volatilities of hours and output, and requires technological shocks of a lower magnitude to generate the observed volatility of output. Finally, the modified model is capable of reproducing some of the stylized response patterns from the recent empirical literature.

Weekly employee hours, weeks worked and intertemporal substitution

Abstract We show that the representative consumer model fits the aggregate consumption and employment data well if a choice of work is allowed both at the intensive and extensive margins. The structural preference parameters recovered from the estimation of the Euler equations of the model are economically meaningful and the null hypothesis of the overidentifying restrictions implied by our model is far from being rejected. We find that the shares in preferences associated with leisure time in the weeks off and in the workweeks are quite large and about equal. Our estimates also uncover relatively large intertemporal substitution elasticities.

The stabilizing effects of price flexibility in contract-based models☆

We Show That the Destabilizing Effects of Price Flexibility Due to the Increased Sensitivity of Contract Wages to Labor Market Tightness Depends Critically on an Arbitrary Restriction on the Information Available to Wage Settes Who Ae Negotiating Contact Renewals. If These Agents Are Put on the Same Footing As Investors and the Monetary Authorities by Being Given Access to Current Information Then Increased Price Flexibility Can Reduce the Magnitude of Economic Fluctuations in the Face of Demand Shocks. Contrary to Other Recent Papers, This Result Is Derived Completely Within a Staggered Contracts Framework.

What Explains the Effects of Technology Shocks on Labor Market Dynamics

The sticky-price theory has proved fairly successful in explaining the dynamic effects of technology shocks on employment, at least under weak accommodation of monetary policy to the shocks. Yet, when we extend the analysis to a broader set of labor market variables, including employment as well as real wages and nominal wages, the sticky-price theory cannot claim victory: it fails to account for the observed wage dynamics following technology shocks unless one is willing to assume implausibly large degrees of monetary policy accommodation and large values of labor supply elasticity. We show that a model that allows for a role of nominal wage rigidity, coupled with a modest degree of price stickiness as some recent research suggests, provides a better account for the macroeconomic effects of technology shocks on the labor market.

Interest rate innovations and the business cycle

Abstract Recent evidence from vector autoregressions points towards the importance of interest rate innovations in explaining output variations. We show that this evidence supports an interpretation of business cycles based on nominal contractual rigidities rather than cotinuous market clearing.

The Transmission of Productivity Shocks: What Do We Learn About DSGE Modeling?

Nominal rigidities are known to be important for the transmission of monetary policy. We argue that nominal rigidities are important also for the transmission of technology shocks, especially for explaining their effects on hours and real wages. Evidence suggests that a positive technology shock leads to a short-run decline in labor hours and a gradual rise in real wages. We examine the ability of an RBC model augmented with real frictions, a pure sticky-price model, a pure sticky-wage model, and a model combining sticky prices and sticky wages in accounting for this evidence. For each model, we examine the implications of the Frisch elasticity of hours and the extent of monetary policy accommodation for the results. We show that both sticky prices and sticky nominal wages are important for explaining the observed effects of technology shocks on labor market variables. This finding is robust and it holds with a small Frisch elasticity of hours and a relatively high frequency of price re-optimization that are consistent with microeconomic evidence.