This paper shows that the ability of the credible wage bargaining model to match the observed unemployment volatility hinges on an unrealistic assumption about disagreement payoffs to the firm. Relaxing this assumption can lead to the substantial wage flexibility. As a consequence, the model is unable to capture the observed unemployment volatility.

We develop an open economy model of a currency union with frictional goods markets and endogenous search decisions to study optimal monetary and fiscal policy. Households finance consumption with a common currency and can search for locally produced goods across regions that differ in their market characteristics. Equilibrium is generically inefficient due to regional spillovers from endogenous search decisions. While monetary policy alone cannot correct this distortion, fiscal policy can help improve allocations by taxing or subsidizing production at the regional level. When households of only one region can search, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in search decisions. Optimal policy when households from both region search requires the Friedman rule and zero production taxes in both regions.

Macroeconomic models of the economy with rigid wage structures tend to predict unrealistically volatile labor hours and countercyclical productivity. This study extends the Cho–Cooley model by incorporating labor market frictions and efficient bargaining as an alternative contracting scheme in which contracts are forward-looking and specify labor hours and wage rates. By accounting for search frictions and realistic contractual schemes, the extended model overcomes two counterfactual predictions: (1) excess volatility of employment and output and (2) countercyclical productivity. However, the extended model fails to produce the Beveridge curve.

In this paper, we investigate the impact of globalization on wages earned by low- and high-skill workers when openness leads to the outsourcing of high-tech jobs abroad. We have shown that low-skill workers may become considerably better off after globalization because high-skill workers start accepting low-tech jobs. The switch in the behavior of high-skill workers brings about general equilibrium responses from the firm side of the labor market with the outside options for low-skill workers improving significantly. This feedback works as a magnification mechanism that leads to a discontinuous wage increase that one would not be able to get without careful modeling of the frictions in the labor market.