Employment Fluctuations with Equilibrium Wage Stickiness
American Economic Review
vol. 95,
no. 1, March 2005
(pp. 50-65)
Abstract
Following a recession, the aggregate labor market is slack–employment remains below normal and recruiting efforts of employers, as measured by help-wanted advertising and vacancies, are low. A model of matching friction 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 stickiness vastly increases the sensitivity of the model to driving forces. I develop a new model of the way that wage stickiness affects unemployment. The stickiness arises in an economic equilibrium and satisfies the condition that no worker-employer pair has an unexploited opportunity for mutual improvement. Sticky wages neither interfere with the efficient formation of employment matches nor cause inefficient job loss. Thus the model provides an answer to the fundamental criticism previously directed at sticky-wage models of fluctuations.Citation
Hall, Robert, E. 2005. "Employment Fluctuations with Equilibrium Wage Stickiness." American Economic Review, 95 (1): 50-65. DOI: 10.1257/0002828053828482JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
- E32 Business Fluctuations; Cycles
- J41 Labor Contracts
- J64 Unemployment: Models, Duration, Incidence, and Job Search