Three Unemployment Rates Relevant To Monetary Policy

Lucian Croitoru

Journal for Economic Forecasting, 2011, issue 3, 213-238

Abstract: We construct a Neo-Keynesian model, with a standard utility specification and nominal rigidities, in which monopolistic firms have employment-related norms and the wage bargaining power is variable. Due to norms, firms hire workers in excess of the number of employees required by technology. Workers in excess are efficiency reserves of the firms. We present the implications for the unemployment-inflation trade-off. We show that, with norms and variable bargaining power, besides the natural rate of unemployment, the unemployment rate at which firms establish/cancel norms, and the one at which the labor bargaining power reach maximum are relevant to decision making We show that, in the presence of norms, the response of the unemployment rate to a change in the monetary policy stance is relatively large, and temporarily concomitant increases in the unemployment rate and inflation can occur.

Date: 2011
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