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Overtime Labor, Employment Frictions, and the New Keynesian Phillips Curve

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JournalReview of economics and statistics
DateAccepted/In press - 28 Mar 2013
DateE-pub ahead of print - 23 Sep 2014
DatePublished (current) - Oct 2014
Issue number4
Volume96
Number of pages12
Pages (from-to)767-778
Early online date23/09/14
Original languageEnglish

Abstract

This paper presents a New Keynesian (NK) model that is extended to differentiate between straight time and overtime work. The model proposes that the New Keynesian Phillips curve (NKPC) should be estimated with marginal cost measured in terms of overtime labor; the resulting coefficient estimates are in accordance with theory and statistically significant for the hybrid NKPC (which allows for backward-looking price setters) but not for the purely forward-looking NKPC. In the hybrid model, backward-looking behavior is found to be predominant. The paper also shows that the incorporation of employment frictions (predetermined employment and convex adjustment costs) in NK models helps reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level.

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© 2014 The President and Fellows of Harvard College and the Massachusetts Institute of Technology. This is an author produced version of a paper published in The Review of Economics and Statistics. Uploaded in accordance with the publisher's self-archiving policy.

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