Real business cycles and labor markets with imperfectly flexible wages

One of the principal criticisms of real business cycle models is that the assumptions made about labor markets do not accord with the actual structure of these markets. This paper replaces the standard spot labor market with a market characterized by imperfectly flexible wages, which corresponds to impressions of contractual labor relations. It is found that the behavior of the model, in terms of the predicted variances and correlations, is similar to that of the standard real business cycle model, but that the variability of hours worked and the correlation of hours worked with wages will depend on the structure of the labor market.