Business cycles and wage rigidity

In this paper, we analyze the impact of downward wage rigidity on the labor market dynamics. We shows that imposing downward wage rigidity in a matching model with cyclical fluctuations in productivity, endogenous match-destruction, and on-the-job search, quits are procyclical and layoffs countercyclical. Using the European Community Household Panel (ECHP), we provide evidence that downward wage rigidity is empirically relevant in ten European countries. Finally, we show that layoffs are countercyclical and quits are procyclical, as predicted by the model.

Graphical abstractFigure optionsDownload full-size imageDownload as PowerPoint slideHighlights► This paper analyzes the impact of downward wage rigidity on the labor market. ► In a matching model with downward wage rigidity, quits are procyclical. ► In the model layoffs countercyclical. ► In Europe, downward wage rigidity is empirically relevant. ► Layoffs are countercyclical and quits are procyclical, as predicted by the model.