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Swedish Wage Formation -Does it Work? Report for "Långtidsutredningen" (the Swedish Long Term Comitte, in Swedish with English summary)

http://www.regeringen.se/sb/d/12401
http://www.regeringen.se/sb/d/13796/a/157922

Do Sticky Prices Make Sense?
with Johan Söderberg, October 2010
A main argument for New Keynesian DSGE models is that they have solid microfoundations, but staggered prices and wages are exogenously imposed. How plausible are sticky prices and wages in these models? We show that, in a standard model, there is implausibly large volatility of production and labor supply on the microeconomic level. Also, rationality is violated as households sometimes end up with negative markups and substantial "menu costs are needed in order to rationalize the assumed behavior. We present an alternative model with eciency wages and customer markets that has similar dynamics at the macro level and more plausible behavior on the micro level. In the alternative model, substantially smaller menu costs are required to support an equilibrium with sticky prices and wages.

Supply, Demand, and Employment Dynamics
with Mikael Carlsson and Stefan Eriksson, February 2011 (revised version of working paper 2006:7).
How important is imperfect competition in the product market for employment dynamics? To investigate this, we formulate a theoretical model of employment adjustment with imperfect competition in the product market, search frictions, and convex adjustment costs. From this model, we derive a structural equation for employment that we estimate on firm-level data. We find that product market demand shocks have significant and quantitatively large effects on employment. Thus, product market imperfections seem to be important for employment dynamics. However, we find no evidence that the tightness of the local labor market affects job creation in existing firms.

Price and Investment Dynamics: Theory and Plant Level Data
with Magnus Lundin, Charlotte Bucht and Tomas Lindström
JOURNAL OF MONEY CREDIT AND BANKING 41, pp. 907-934,  2009.  
We construct a model of a firm competing for market share in a customer market and making investments in physical capital. The firm is financially constrained and there are implementation lags in investment. Our model predicts that product prices should depend on costs and competitors’ prices, but respond weakly to demand shocks. Also, prices should be strongly related to investment. Estimating price and investment equations on panel data for Swedish manufacturing plants we find results which are qualitatively in line with these predictions, though the relation between investment and prices is stronger than predicted by our model.

Prices, Productivity, and Wage Bargaining in Open Economies,
with Anders Forslund and Andreas Westermark
SCANDINAVIAN JOURNAL OF ECONOMICS  110, pp.169-195, 2008
According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product market conditions together determine wages. A wage equation is derived and estimated on aggregate data for the Nordic countries. Wages are found to depend on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.

Ranking of Job Applicants, One-the-job Search and Persistent Unemployment, with Stefan Eriksson, Labour Economics, 12:3, pp. 407-428, 2005.
We formulate an efficiency wage model with on-the-job search where wages depend on turnover and employers may use information on whether the searching worker is employed or unemployed as a hiring criterion. We show theoretically that ranking by employment status affects both the level and the persistence of unemployment and numerically that these effects are substantial. More prevalent ranking in Europe compared to the US – because of more rigid wage structures etc. - could potentially help to explain the high and persistent European unemployment.

Booms and Busts in EMU, Working paper 2003:29, Department of Economics, Uppsala University.
Even if there is noise in exchange rates that is unrelated to current fundamentals, a floating exchange rate and a clear inflation target can be a powerful pair that maintains overall macroeconomic balance. Under plausible conditions, most of the stabilisation will occur through the exchange rate, and fundamental shocks will generate considerable medium term exchange rate volatility. The consequences of asymmetric shocks in EMU are worse than envisaged in early analyses of the EMU project such as Calmfors et al. (1997). Inflation and real interest rate differentials arise which magnify the imbalances and cause boom-bust cycles in the member countries.

Market Shares, Finance Constraints, and Pricing Behavior in the Export Industry, Economica 69, 583-607, 2002.
A parsimonious structural model of price and quantity dynamics is applied to Swedish exports and export prices for manufactured goods 1972-1996. Two sources of dynamics are considered: customer markets and pre-set prices. The dynamic adjustment of exports is very much in line with what the customer market model predicts: the market share adjusts slowly after a change in the relative price. Prices are sticky in the sense that they do not reflect the most recent information about costs and exchange rates. Prices are high when firms are borrowing heavily, supporting the argument in Gottfries (1991) that financial constraints affect pricing behavior.
Program files: Indata.tsp Findata98.tsp Peqsim1.tsp

Insider Bargaining Power, Starting Wages, and Involuntary Unemployment, with Tomas Sjöström, Scandianvian Journal of Economics 102(4), 669-688, 2000.
Recent analyses of wage bargaining has emphasized the distinction between insiders and outsiders, yet one typically assumes that insiders and recently hired outsiders are paid the same wage. We consider a model where the starting wage for outsiders may be lower than the insider wage, but incentive constraints associated with turnover affect the form of the contract. We examine under what conditions the starting wage is linked to the insider wage so that increased bargaining power of insiders raises the starting wage and reduces hiring of outsiders.