We extend the endogenous growth model of Kung and Schmid (2015) by adding endogenous labor dynamics and wage rigidities. This leads to an increase of about 250 basis points in risk premia. Additionally, it brings labor market quantities much closer to their empirical counterparts. In particular, wage rigidities generate an increase of around 60 basis points in labor growth volatility.
JEL Codes: E22, G12, O30, O41.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.