The NAIRU and the Wage-setting / price setting loop: a new skilled/unskilled specification

Abstract

The long-term equilibrium unemployment rate has returned to the center of the economic debate in France. It derives from two macroeconomic equations. Wages are the result of wage bargaining on the labor market (wage-setting equation) and firms set the corresponding level of employment (price-setting equation). We revisit the wage-price loop by introducing two types of workers : skilled and unskilled. This enables us to distinguish two effects of social contributions on labor : a substitution effect due to the change in relative cost of workers, and the effect on the wedge of the wage bargaining process. We compute a long-term equilibrium unemployment rate that depends, in France, on the terms of trade, the employer social contributions rate for low-wage workers, and the real cost of capital. We finally include the wage-setting and price-setting equations in the French macroeconometric MESANGE model and carry out dynamic simulations in order to analyze the impact upon the French economy of simple shocks such as an increase in long-term labor productivity or an decrease in the rate of social contributions.wage bargaining, skills, unemployment, labor market policy