Business Cycles and Wage Rigidity

This paper analyzes the impact of downward wage rigidity on the labor market. It shows that imposing downward wage rigidity in a matching model with cyclical fluctuations in productivity, endogenous match-destruction, and on-the-job search, quits are procyclical and layoffs countercyclical. It provides evidence that downward wage rigidity is empirically relevant in ten European countries. It finally shows that layoffs are countercyclical and quits are procyclical, as predicted by the model.