Seminar

Unemployment Fluctuations, Match Quality, and the Wage Cyclicality of New Hires

Antonella Trigari (University of Bocconi)

May 4, 2015, 17:00–18:30

Room MS 001

Macroeconomics Seminar

Abstract

Recent papers interpret micro-level findings of greater cyclicality in the wages of new hires as evidence for flexible wages of new hires, thus concluding that wage rigidity is not an empirically plausible mechanism for resolving the unemployment volatility puzzle. We analyze data from the Survey of Income and Program Participation (SIPP) to argue that greater cyclicality of wages for new hires reflects cyclicality in the composition of match quality across new hires from employment. After controlling for the cyclicality of wages for new hires from other jobs, we find no evidence for greater wage flexibility for new hires from unemployment. In light of our empirical findings, we study an equilibrium model of unemployment with staggered Nash bargaining, heterogeneous match quality, and on-the-job search. Workers in bad matches vary their search intensity according to the probability of finding a better match, generating cyclicality in the contribution of bad-to-good transitions to total job-to-job flows. Using simulated data from our model, we compute measures of new hire wage cyclicality analogous to those found in the literature and show that cyclical match composition in our model generates spurious evidence of new hire wage flexibility of comparable in magnitude to what we estimate from the SIPP. The model is also successful in accounting for the cyclicality of aggregate wages and the dynamics of unemployment. (With Mark Gertler, Chris Huckfeldt)