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Wage Determination and Employment Fluctuations

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  • Robert E. Hall

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.

Suggested Citation

  • Robert E. Hall, 2003. "Wage Determination and Employment Fluctuations," NBER Working Papers 9967, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9967
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    References listed on IDEAS

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    Cited by:

    1. Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1600-1621, May.
    2. Jordi Galí & Thijs van Rens, 2008. "The vanishing procyclicality of labor productivity," Economics Working Papers 1230, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2010.
    3. Fang Yao, 2008. "Lumpy Labor Adjustment as a Propagation Mechanism of Business Cycles," SFB 649 Discussion Papers SFB649DP2008-056, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. 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.
    5. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April.
    6. Sheen, Jeffrey & Wang, Ben Zhe, 2016. "Assessing labor market frictions in a small open economy," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 231-251.
    7. Raquel Fonseca & Lise Patureau & Thepthida Sopraseuth, 2009. "Divergence in Labor Market Institutions and International Business Cycles," Annals of Economics and Statistics, GENES, pages 279-314.
    8. Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2005. "A reappraisal of the inflation-unemployment tradeoff," European Journal of Political Economy, Elsevier, vol. 21(1), pages 1-32, March.
    9. Christoffel, Kai & Linzert, Tobias, 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).
    10. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    11. Thijs van Rens, 2004. "Organizational capital and employment fluctuations," Economics Working Papers 944, Department of Economics and Business, Universitat Pompeu Fabra.
    12. Faia, Ester, 2009. "Ramsey monetary policy with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 570-581, May.
    13. repec:eee:poleco:v:48:y:2017:i:c:p:54-73 is not listed on IDEAS
    14. Faia, Ester & Campolmi, Alessia, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 619, European Central Bank.
    15. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
    16. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "The Replacement Problem In Frictional Economies: A Near-Equivalence Result," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1007-1057, September.
    17. Dimitris Papageorgiou & Evangelia Vourvachaki, 2015. "The Macroeconomic Impact of Structural Reforms in Product and Labour Markets: Trade-Offs and Complementarities," Working Papers 197, Bank of Greece.
    18. Dimitris Papageorgiou, 2014. "BoGGEM: a dynamic stochastic general equilibrium model for policy simulations," Working Papers 182, Bank of Greece.
    19. Bamikole, Oluwafemi, 2013. "The Impact of Minimum Wage on Average Earnings in the Caribbean using Two-Selected Countries, Trinidad and Tobago and Jamaica (1980-2011 and 1997-2011)," MPRA Paper 57363, University Library of Munich, Germany.
    20. David Cook & Hiromi Nosaka, 2006. "Dual labor markets and business cycles," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    21. Cornelissen, Thomas & Hübler, Olaf, 2005. "Downward Wage Rigidity and Labour Mobility," IZA Discussion Papers 1523, Institute for the Study of Labor (IZA).
    22. 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.
    23. Christoffel, Kai & Linzert, Tobias, 2005. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Working Paper Series 556, European Central Bank.
    24. Richard Rogerson & Robert Shimer & Randall Wright, 2004. "Search-Theoretic Models of the Labor Market-A Survey," NBER Working Papers 10655, National Bureau of Economic Research, Inc.
    25. 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.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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