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Discussion of “Changes in WageAdjustment, Employment Adjustment, and
the Phillips Curve”by Isamu Yamamoto
Robert Shimer
June 23, 2008
Introduction
“Shimer: Discussion of Yamamoto” -p. 2
review evidence on flattening of the Phillips curve
focus on why unemployment rose in the 1990s
conclusion: byproduct of the “lost decade”
Unemployment Rate: Japan
“Shimer: Discussion of Yamamoto” -p. 3
0
1
2
3
4
5
6
1960 1970 1980 1990 2000 2010
year
unem
ploy
men
trat
e
Wage Inflation: Japan
“Shimer: Discussion of Yamamoto” -p. 4
−5
0
5
10
15
20
25
1960 1970 1980 1990 2000 2010
year
infla
tion
rate
Wage Inflation: Japan
“Shimer: Discussion of Yamamoto” -p. 4
−5
0
5
10
15
20
25
1960 1970 1980 1990 2000 2010
year
infla
tion
rate wage
price
Phillips Curve: Japan
“Shimer: Discussion of Yamamoto” -p. 5
−5
0
5
10
15
20
25
0 1 2 3 4 5 6
unemployment rate
wag
ein
flatio
n
bbb
bbb b
b
bbb
b
b
×× × ××
× ×× ×
×
××××
bcbc
bc
bc
bc
bc
bc
bcbc
1971–2006
Phillips Curve: US
“Shimer: Discussion of Yamamoto” -p. 6
0
2
4
6
8
10
0 2 4 6 8 10unemployment rate
wag
ein
flatio
n
bbb
b
bb
b
b
b
b
bb
b
bb b
b
b
b
b
b
bb
b
bb
b
bbbb
bbb
bb b
bb
b
b
b
1965–2006
Two Questions
“Shimer: Discussion of Yamamoto” -p. 7
why has inflation fallen?
why has the unemployment rate increased?
not obvious whether unemployment volatility has increased
Two Questions
“Shimer: Discussion of Yamamoto” -p. 7
why has inflation fallen?
why has the unemployment rate increased?
not obvious whether unemployment volatility has increased
paper focuses on the second question; so will I
Hypotheses
“Shimer: Discussion of Yamamoto” -p. 8
downward nominal wage rigidity
more elastic labor supply
higher employment adjustment costs
fewer discouraged workers
rise in other real rigidities
Hypotheses
“Shimer: Discussion of Yamamoto” -p. 8
downward nominal wage rigidity
more elastic labor supply
higher employment adjustment costs
fewer discouraged workers
rise in other real rigidities
Male and Female Unemployment
“Shimer: Discussion of Yamamoto” -p. 9
0
1
2
3
4
5
6
1960 1970 1980 1990 2000 2010
year
unem
ploy
men
trat
e men
women
Search Approach to Unemployment
“Shimer: Discussion of Yamamoto” -p. 10
matching workers and jobs is time-consuming
emphasis on indivisibility in labor supply
concrete notion of unemployment (not just hours worked)
useful framework for thinking about real wage rigidities
main citations
Pissarides (1985)
Mortensen and Pissarides (1994)
Shimer (2005)
Hall (2005)
Firm’s Problem
“Shimer: Discussion of Yamamoto” -p. 11
firm allocates employees between production and recruiting
each producer generates output zt, paid wt
each recruiter attracts µt workers next period, paid wt
workers leave with probability xt
Firm’s Problem
“Shimer: Discussion of Yamamoto” -p. 11
firm allocates employees between production and recruiting
each producer generates output zt, paid wt
each recruiter attracts µt workers next period, paid wt
workers leave with probability xt
marginal value of an employee is Jt:
Jt = zt
(
1 +1 − xt
µt
)
− wt
for firms to be willing both to recruit and produce:
zt = µtβEt
u′(ct+1)
u′(ct)Jt+1
Firm’s Problem
“Shimer: Discussion of Yamamoto” -p. 11
firm allocates employees between production and recruiting
each producer generates output zt, paid wt
each recruiter attracts µt workers next period, paid wt
workers leave with probability xt
marginal value of an employee is Jt:
Jt = zt
(
1 +1 − xt
µt
)
− wt
for firms to be willing both to recruit and produce:
zt = µtβEt
u′(ct+1)
u′(ct)Jt+1
higher wt relative to zt implies higher µt and unemployment
Wage Dynamics
“Shimer: Discussion of Yamamoto” -p. 12
“standard” case: wt = w̄zt
small effects from productivity shocks
search frictions allow for rigid wages
e.g. wt = ρwt−1 + (1 − ρ)w̄zt
ρ indexes wage rigidity
Consequences of an Adverse Shock
“Shimer: Discussion of Yamamoto” -p. 13
one-time decline in zt
value of an employee Jt falls
recruiting effort falls
recruiting productivity µt rises
unemployment rises
wages gradually fall
negative relationship between unemployment and the real wage
Wage Curve: US
“Shimer: Discussion of Yamamoto” -p. 14
−6
−4
−2
0
2
4
6
0 2 4 6 8 10
unemployment rate
real
wag
egr
owth b
bbb
b
b
b
b
b
b
b
bb
b
b
b
b
b
b
bb
b
bbbb b
bbbb
b
b
b
b
bb
b
b
bb
b
1965–2006
Wage Curve: Japan
“Shimer: Discussion of Yamamoto” -p. 15
−2
0
2
4
6
8
10
0 1 2 3 4 5 6
unemployment rate
real
wag
egr
owth
bc
bc
bc
bc
bcbc
bc
bcbc
b
b
bbb
b
bb
b
bb
b b
×
××
×
×
×
×
××
×
×
×
××
1971–2006
Wage Curve
“Shimer: Discussion of Yamamoto” -p. 16
influenced by nonmonetary and monetary factors
likely more robust than Phillips curve
no obvious changes over this time period
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