Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics

This paper modifies the standard one-sector stochastic growth model in an effort to explain the observed low procyclicality of the aggregate real wage in the US. The modifications include labor market matching with Nash-bargaining of wages and preferences as introduced in the literature by Rogerson and Wright [1988]. These preferences are non-separable in consumption and leisure. They imply that in an equilibrium with effcient risk-sharing, the utility of employed agents exceeds that of unemployed agents. The simulation results suggest that our modified model overcomes one important weakness of the standard model, namely the predicted high contemporaneous correlation of the aggregate real wage with both output and labor input. (Copyright: Elsevier)