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Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market

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  • Robert E. Hall

    (Hoover Institution and Department of Economics, Stanford University and National Bureau of Economic Research)

Abstract

I consider three views of the labor market. In the first, wages are flexible and employment follows the principle of bilateral efficiency. Workers never lose their jobs because of sticky wages. In the second, wages are sticky and inefficient layoffs do occur. In the third, wages are also sticky, but employment governance is efficient. I show that the behavior of flows in the labor market strongly favors the third view. In the modern U.S. economy, recessions do not begin with a burst of layoffs. Unemployment rises because jobs are hard to find, not because an unusual number of people are thrown into unemployment. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 87 (2005)
Issue (Month): 3 (August)
Pages: 397-407

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Handle: RePEc:tpr:restat:v:87:y:2005:i:3:p:397-407

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  1. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, Econometric Society, vol. 70(6), pages 2295-2350, November.
  2. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Sciences Po publications, Sciences Po info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  3. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 676-90, September.
  4. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  5. Bruce C. Fallick & Charles A. Fleischman, 2001. "The importance of employer-to-employer flows in the U.S. labor market," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-18, Board of Governors of the Federal Reserve System (U.S.).
  6. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, American Economic Association, vol. 72(5), pages 968-79, December.
  8. Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-59, November.
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