Firm-Specific or Household-Specific Sticky Wages in the New Keynesian Model?

This paper shows that switching the dominant use of household-specific sticky wages in the New Keynesian model (Erceg, Henderson, and Levin 2000) for firm-specific sticky wages has qualitative and quantitative consequences. First, the model with firm-specific sticky wages incorporates endogenous changes in the rate of unemployment, whereas there is no unemployment with household-specific sticky wages. Secondly, business-cycle fluctuations of wage inflation and the real wage are clearly distinguishable. In particular, the real wage is countercyclical after a demand shock under any sensible calibration with firm-specific sticky wages, whereas the model with household-specific sticky wages requires larger wage stickiness than price stickiness. Finally, optimal monetary policy is more oriented to stabilizing price inflation with firm-specific sticky wages, and is more oriented to stabilizing the output gap and wage inflation with household-specific sticky wages.