Wage rigidity and destabilizing spirals

This paper investigates the impact of real wage rigidity on the (de)stabilizing role of demand feedback. I show that destabilizing supply-demand feedback driven by countercyclical precau-tionary savings demand against uninsured unemployment risk is fundamentally a matter of rigid real wage adjustments over business cycles. Given the estimated wage rigidity consistent with aggregate labor market dynamics in the United States, the quantitative results suggest that the unemployment risk channel has a minor impact on aggregate volatility.

Automated summary

This paper examines the relationship between real wage rigidity and the destabilizing role of demand feedback. The findings indicate that the instability of supply-demand feedback driven by countercyclical precautionary savings demand against uninsured unemployment risk is primarily influenced by rigid real wage adjustments. Based on the estimated wage rigidity in the United States labor market, the quantitative results suggest that the unemployment risk channel has a minimal impact on aggregate volatility.