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Philippe Weil, ECARES Print
Friday, 15 March 2019, 12:15 - 13:15

Philippe Weil, ECARES

Slackness Regimes and the Phillips Curve in a Frictional Economy

Abstract : We study an economy with frictional goods and labor markets and characterize the set equilibria in prices and wages relative to a planner’s allocation. Aggregate demand determines the marginal revenue of labor through its effect on the price for the good sold and the likelihood of finding demand. The constrained efficient price maximizes the marginal revenue of labor, balancing the price and trading effects, while the constrained efficient wage trades off the benefits of job creation against the cost of turnover in the labor market. This double Hosios condition on prices and wages also minimizes the elasticity of labor market tightness and the volatility of the economy to a demand shock. Moreover, the relative response of wages and unemployment, the slope of a wage Phillips curve, flattens as worker’s lose bargaining power, and is minimized when there is efficient rent sharing in the goods market between consumers and producers.

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