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Wages and the Allocation of Hours and Effort

  • Mark Bils
  • Yongsung Chang

We examine the impact of wage stickiness when employment has an effort as well as hours dimension. Despite wages being predetermined, the labor market clears through the effort margin. We compare this model quantitatively to models with flexible and sticky wages, but no effort margin. Allowing for responses in effort dramatically improves the ability of a sticky-wage model to mimic U.S. business cycles. The model produces fluctuations in hours that are intermediate to the standard flexible-wage and sticky-wage models; but output and consumption behave much like in the flexible-wage economy. Consequently, welfare costs of wage stickiness are potentially much, much smaller if one entertains an effort dimension.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7309.

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Date of creation: Aug 1999
Date of revision:
Publication status: published as Bils, Mark and Youngsung Chang. "Cyclical Movements In Hours And Efforts Under Sticky Wages," International Economic Journal, 2002, v15(2,Summer), 1-26.
Handle: RePEc:nbr:nberwo:7309
Note: EFG
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  1. Mark Bils & Jang-Ok Cho, 1993. "Cyclical factor utilization," Discussion Paper / Institute for Empirical Macroeconomics 79, Federal Reserve Bank of Minneapolis.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
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