Unemployment Fluctuations with Staggered Nash Wage Bargaining

A number of authors have argued that the conventional model of unemployment dynamics due to Mortensen and Pissarides has difficulty accounting for the relatively volatile behavior of labor market activity over the business cycle. We address this issue by modifying the Mortensen-Pissarides framework to allow for staggered multiperiod wage contracting. What emerges is a tractable relation for wage dynamics that is a natural generalization of the period-by-period Nash bargaining outcome in the conventional formulation. We then show that a reasonable calibration of the model can account for the cyclical behavior of wages and labor market activity observed in the data.