The introduction of both market-clearing wages and nominal rigidities on wage setting can be used to rationalize unemployment as excess supply of labor in the New Keynesian model. As a result, wage inflation dynamics are forward-looking and depend negatively on the rate of unemployment....

The implications of search frictions on the inflation dynamics are shown here for the case with wage adjustments typically belonging to the New Keynesian model, not to the Mortensen-Pissarides framework. In that model variant, I identify the role of search frictions by an additional term...