Discussion of 'Endogenous Wage Indexation and Aggregate ...Primiceri Discussion of Carrillo,...

DiscussionofEndogenousWageIndexa.onandAggregateShocks,

byCarrillo,PeersmanandWauters

Primiceri DiscussionofCarri l lo, PeersmanandWauters

GiorgioPrimiceri NorthwesternUniversity

Seventh BIS CCA Research Conference Lima,May19,2016


Thispaper

n  StandardDSGEmodel

✚  WorkerscanchoosetheindexaKonschemeoftheirlaborcontractCanindexto:Ø  pastinflaKonØ  CentralBankinflaKontarget


Thispaper



=  Non-trivialextension


Thispaper



=  Non-trivialextension

n  Modelcalibratedandthensolvedusingnonlineartechniques


Thispaper

n  Results

1.  ModelmatchestheavailableempiricalevidenceonwageindexaKon

2.  WorkerspreferindexingwagestopastinflaKonwhentechnologyorinfla-on-targetshocksareprevalent

3.  Thedecentralizedequilibriumdiffersfromtheplanner’sØ  PlannerprefersindexaKontopastinflaKonwhendemandshocksareimportant


Thispaper

n  Results




n  State-of-the-artDSGEmodelingexercise


Thispaper

n  Results




n  State-of-the-artDSGEmodelingexercise

n  PotenKallyimportantfindings


WhydoIsaypoten.ally?Mycomments

1.  MoKvaKonandevidence

2.  Well-executedpaper,butliZleeconomicintuiKonfortheresults

3.  InteresKngresult:inefficiencyofprivatewageindexaKonchoice


1.MoKvaKon

n  LargeliteratureonstructuralbreaksinUSpostwarmacrodynamics

n  Hofmann,PeersmanandStraub(2012)Ø  Long-runeffectofshocksonpricesandwagesisstrongerinthe1970sthan80sØ  ChangesinMPrulenotenoughtoexplainthispaZernØ MostlikelyexplanaKon:higherwageindexaKoninthe1970s


1.MoKvaKon

n  LargeliteratureonstructuralbreaksinUSpostwarmacrodynamics

n  Hofmann,PeersmanandStraub(2012)Ø  Long-runeffectofshocksonpricesandwagesisstrongerinthe1970sthan80sØ  ChangesinMPrulenotenoughtoexplainthispaZernØ MostlikelyexplanaKon:higherwageindexaKoninthe1970s

n  NaturalquesKon:WhydidindexaKonchange?

➥ ThispaperendogenizeswageindexaKonchoice


1.Empiricalevidence

n  COLAcoverageØ  ProporKonofunionworkersinlargecollecKvebargainingagreementswith

explicitcontractualwageindexaKonclauses


COLAcoverageTables and figures

Figure 1: Presumed wage indexation in the U.S.

1950 1960 1970 1980 1990 20000

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Time

COLA

inde

x

Note: The COLA index gives the proportion of union workers in large collective bargaining agreementswith explicit contractual wage indexation clauses. The series is annual from 1956-1995. Source: Raganand Bratsberg (2000).

30


1.Empiricalevidence


explicitcontractualwageindexaKonclausesØ  FracKonofworkerscoveredbyunionsissmallandshrinking

n  23%in1983to12%in2014


1.Empiricalevidence



n  23%in1983to12%in2014

n  AnyevidenceofwageindexaKoninnon-unionsector?


1.Empiricalevidence



n  23%in1983to12%in2014

n  AnyevidenceofwageindexaKoninnon-unionsector?

n  AlternaKveapproach:differentwage-sefngmodelaltogetherØ  ChrisKano,EichenbaumandTrabandt(2015):realwagesaredeterminedby

alternaKngofferbargaining


2.EconomicintuiKon

n  WorkerspreferindexingwagestopastinflaKonwhentechnologyorinflaKon-targetshocksareprevalent

n  Why?


2.EconomicintuiKon


n  Why?

n  My(staKc)intuiKon…


2.My(staKc)intuiKon

n  Forsimplicity,assumeØ  EconomywithonlytechnologyshocksØ  Theeconomyisinsteadystate

n  Workeriisrandomlyselectedtore-setherwageØ WillsetwagetosteadystateØ  Subsequentperiods:shehastobereadytosupplyasmuchlaborasdemanded


2.StaKcintuiKon:AposiKvetechnologyshock

L

W/P

LD desired LS



L

W/P

LD desired LS



L

W/P

LD desired LS



L

W/P No indexation

LD desired LS



L

W/P No indexation

indexation

LD desired LS


2.My(staKc)intuiKon

n  Forsimplicity,assumeØ  EconomywithonlytechnologyshocksØ  Theeconomyisinsteadystate

n  Workeriisrandomlyselectedtore-setherwageØ WillsetwagetosteadystateØ  Subsequentperiods:shehastobereadytosupplyasmuchlaborasdemanded

n  SupposenowtheeconomyishitbyaposiKvetechnologyshockØ  Labordemand⬆⇒shemustworkmoreatthesamenominalwageØ  InflaKon⬇⇒herrealwage⬆⇒lesscostlytoworkmore

n  WillshechoosetoindexherwagetoinflaKon?Ø  Ifshedoes,realwageapproxconstantandsheismoreoffherlaborsupplyØ  Theoppositeofthepaper’sfindings


2.EconomicintuiKon


n  Why?

n  My(staKc)intuiKon…isnotenough


2.EconomicintuiKon


n  Why?


Ø  Istheresomethingmoresubtleinthedynamics?


Responsetoatechnologyshockintheaggregate

0 5 10 15 20-0.15

-0.1

-0.05

0

0.05:

0 5 10 15 200

0.2

0.4

0.6

0.8

1

1.2log(w/p)

0 5 10 15 20-0.7-0.6-0.5-0.4-0.3-0.2-0.10

0.1log(L)

0 5 10 15 20-1.25

-1.2

-1.15

-1.1

-1.05

-1log(MUC)

𝛑


Responsetoatechnologyshockforthe“Calvo”worker

0 5 10 15 200

0.2

0.4

0.6

0.8

1log(w/p)

0 5 10 15 20-1

0

1

2

3

4log(L)

0 5 10 15 20-2

0

2

4

6log(L*W/P)

0 5 10 15 20-0.05

0

0.05

0.1

0.15log(w/p)

0 5 10 15 20-5

0

5

10

15log(L)

0 5 10 15 20-5

0

5

10

15log(L*W/P)

No indexation Indexation


2.EconomicintuiKon


n  Why?


Ø  Istheresomethingmoresubtleinthedynamics?Ø  IsconsumpKonsmoothingthekey?


2.EconomicintuiKon


n  Why?


Ø  Istheresomethingmoresubtleinthedynamics?Ø  IsconsumpKonsmoothingthekey?Ø  Isthelaborsupplyschedulereallyflat?



L

W/P No indexation

indexation

LD desired LS



L

W/P No indexation

indexation

LD

desired LS


3.Decentralizedequilibriumvsplanner’ssoluKon

n  IndexaKontopastinflaKonØ Workers:whentechnologyorinflaKon-targetshocksareprevalentØ  Planner:whendemandshocksareprevalent




n  Planner’ssoluKoniseasiertounderstandØ  Plannerwantstoachievethefirstbest:

n  Economyshouldrespondtotechnologyshocksn  Economyshouldnotrespondto“demand/inefficient”shocks

Ø  IndexaKonreducesthevariaKonofrealwagesØ  Desirableonlywith“demand/inefficient”shocks




n  Planner’ssoluKoniseasiertounderstandØ  Plannerwantstoachievethefirstbest:

n  Economyshouldrespondtotechnologyshocksn  Economyshouldnotrespondto“demand/inefficient”shocks

Ø  IndexaKonreducesthevariaKonofrealwagesØ  Desirableonlywith“demand/inefficient”shocks

n  Conjecture:Planner’srankingofindexaKonschemesmightbemorerobustthatprivateranking


Mycomments

1.  MoKvaKonandevidenceØ  EvidenceofwageindexaKoninnon-unionsector?

2.  Well-executedpaper,butliZleeconomicintuiKonfortheresultsØ  IntuiKonisimportanttoevaluategeneralityofthefindings

3.  InteresKngresult:inefficiencyofprivatewageindexaKonchoiceØ  Conjecture:Planner’srankingofindexaKonschemesmightbemorerobust

thanprivateranking

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