Imperfect Competition, Nominal Wage Contracts and the Business Cycle

by Janko, Zuzana

We introduce nominal wage contracts into a competitive and a noncompetitive labor market structure. We find these models to have similar business cycle properties, but we argue that the imperfectly competitive market structure is more appropriate for nominal wage contract analyzes. We introduce imperfect competition to the labor market by assuming that households have market power and consequently choose nominal wage contracts as part of their maximization problem, while in a competitive structure nominal wage contracts are introduced via an exogenous rule. The latter formulation lacks microeconomic foundation that makes the model inappropriate for the analysis of nominal wage contracts.

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