Search with Wage Posting under Sticky Prices

Abstract

We consider the macroeconomic implications of the interaction between nominal rigidities and labor market frictions in a framework where …rms jointly make pricing and hiring decisions. In our New Keynesian model, workers randomly search for jobs and are matched with …rms that post take-it-or-leave-it contracts and are subject to sticky prices. Relative to the typical model that separates search frictions and nominal frictions into wholesale and retail …rms, respectively, our model implies smoother wages because …rms can affect their marginal costs by adjusting prices. A consequence of smoother wages is that the vacancy-to-unemployment ratio responds much more than under the standard model.