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Wage Determination and Employment Fluctuations

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Author Info
Robert E. Hall

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Abstract

Following a recession, the aggregate labor market is slack employment remains below normal and recruiting efforts of employers, as measured by vacancies, are low. A model of matching frictions explains the qualitative responses of the labor market to adverse shocks, but requires implausibly large shocks to account for the magnitude of observed fluctuations. The incorporation of wage-setting frictions vastly increases the sensitivity of the model to driving forces. I develop a new model of wage friction. The friction arises in an economic equilibrium and satisfies the condition that no worker-employer pair has an unexploited opportunity for mutual improvement. The wage friction neither interferes with the efficient formation of employment matches nor causes inefficient job loss. Thus it provides an answer to the fundamental criticism previously directed at sticky-wage models of fluctuations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9967.

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Date of creation: Sep 2003
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Handle: RePEc:nbr:nberwo:9967

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution

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References listed on IDEAS
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  8. Olivier Jean Blanchard & Peter Diamond, 1991. "The Cyclical Behavior of the Gross Flows of U.S. Workers," NBER Reprints 1582, National Bureau of Economic Research, Inc.
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  9. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July. [Downloadable!] (restricted)
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  1. James S. Costain & Michael Reiter, 2003. "Business Cycles, Unemployment Insurance, and the Calibration of Matching Models," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  2. Thijs van Rens, 2004. "Organizational Capital and Employment Fluctuations," Economics Working Papers 944, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  3. Fang Yao, 2008. "Lumpy Labor Adjustment as a Propagation Mechanism of Business Cycles," SFB 649 Discussion Papers SFB649DP2008-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  4. David Cook & Hiromi Nosaka, 2005. "Dual labor markets and business cycles," Working Paper Series 2006-36, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  5. Thomas Lubik & Michael Krause, 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Economics Working Paper Archive 504, The Johns Hopkins University,Department of Economics. [Downloadable!]
    Other versions:
  6. Cornelißen, Thomas & Hübler, Olaf, 2005. "Downward Wage Rigidity and Labour Mobility," IZA Discussion Papers 1523, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Ester Faia & Alessia Campolmi, 2005. "Inflation Differentials and Different Labor Market Institutions in the EMU," Money Macro and Finance (MMF) Research Group Conference 2005 80, Money Macro and Finance Research Group. [Downloadable!]
  8. Ester Faia, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series 707, European Central Bank. [Downloadable!]
  9. Michelle L. Barnes & Giovanni P. Olivei, 2003. "Inside and outside bounds: threshold estimates of the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, pages 3-18. [Downloadable!]
  10. Kai Christoffel & Tobias Linzert, 2005. "The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics," IZA Discussion Papers 1896, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  11. Ester Faia, 2006. "Optimal monetary policy rules with labor market frictions," Working Paper Series 698, European Central Bank. [Downloadable!]
    Other versions:
  12. Raquel Fonseca & Lise Patureau, 2008. "Divergence in Labor Market Institutions and International Business Cycles," Working Papers 562, RAND Corporation Publications Department. [Downloadable!]
    Other versions:
  13. Hornstein, Andreas & Krusell, Per & Violante, Giovanni L, 2005. "The Replacement Problem in Frictional Economies: An 'Equivalence Result'," CEPR Discussion Papers 5026, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  14. Alessia Campolmi & Ester Faia, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 619, European Central Bank. [Downloadable!]
  15. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "The replacement problem in frictional economies : a near equivalence result," Working Paper 05-01, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  16. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March. [Downloadable!] (restricted)
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