Working Paper: NBER ID: w7309
Authors: Mark Bils; Yongsung Chang
Abstract: 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.
Keywords: wage stickiness; labor market; effort allocation; business cycles
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage stickiness (J31) | adjustments in effort (D29) |
| wage stickiness + effort dimension (J31) | short-run response of the economy to shocks (E32) |
| nominal shocks (E39) | real wage exceeds flexible wage (J31) |
| real wage exceeds flexible wage (J31) | firms increase effort demanded from workers (J29) |
| firms increase effort demanded from workers (J29) | upward shift in labor demand and supply (J20) |
| upward shift in labor demand and supply (J20) | new equilibrium where hours worked are reduced less (J29) |
| wage stickiness + effort margin (J31) | welfare costs of wage stickiness are significantly smaller (J32) |
| wage stickiness (J31) | nuanced understanding of labor market dynamics (J48) |