The Cyclicality of Marginal Cost and the Dynamics of the Labor Market and Inflation

Mardi | 2017-12-19
Salle des thèses 16h – 17h20

Pierrick CLERC

Existing business-cycle models for which firms unilaterally adjust labor along both the intensive and extensive margins have difficulties in reproducing the dynamics of employment and hours per worker. Within a New-Keynesian framework with search frictions in the labor market, we show that a much higher pro-cyclicality for marginal labor cost than for average labor cost, in accordance with empirical observations, is a crucial mechanism for replicating labor-market fluctuations. At the same time, the large pro-cyclicality of marginal cost is consistent with inflation inertia since this pro- cyclicality induces strong strategic complementarities between price-setters.