In this Appendix we discuss the determination of real wages in a specific-factors model with endogenous labor supply. We redefine the equilibrium condition for the labor market (15) in terms of unit labor requirements aLi:
whereas from the demand for leisure (10) we obtain the response of labor supply:
which is the expression in the text.
In this Appendix we derive the slope of the (λo; πt) schedule. If we differentiate logarithmically the right-hand side of (16), we obtain
where NUMER, and DENOM, stand for the integrals in the numerator and the denominator of (λo; πt) respectively. Working on the first term of the right-hand-side of the above expression we get
Working on the second term, we get
Plugging these results back into (A6), we finally get the expression in the text.
This is a substantially revised version of Chapter V of my dissertation at the University of Rochester. I would like to thank Alan C. Stockman and Carlos A. Végh for many useful discussions on these issues. Comments by Carlos Asilis, José DeGregorio, Don Mathieson, Gian Maria Milesi-Ferretti and Julio Santaella are gratefully acknowledged. All errors are my own responsibility.
In a broad sense, this can also include time devoted to portfolio management and hedging activities that is not negligible for chronic-inflation countries (see DeGregorio 1993).
Feenstra (1986) shows how a cash-in-advance economy can be approximated by another with a utility function with a positive cross derivative between goods and money.
The more recent Argentine stabilization also shows an important increase in labor force participation.
When calculated in terms of an utility-based CPI, real wages fall during the transition of our model. This is actually what happened in Mexico during 1990-91 if we adjust real wages for productivity gains that are not considered in our model.