Working Paper: NBER ID: w9967
Authors: 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.
Keywords: wage determination; employment fluctuations; labor market; economic fluctuations
JEL Codes: E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage frictions (J31) | employment sensitivity to economic shocks (J63) |
| wage frictions (J31) | recruiting efforts (M51) |
| wage frictions (J31) | job-finding rates (J68) |
| economic shocks (F69) | recruiting efforts (M51) |
| economic shocks (F69) | unemployment (J64) |
| wage frictions (J31) | unemployment (J64) |
| wage rigidity (J31) | job matches (C78) |
| higher wages (J39) | recruiting efforts (M51) |
| higher wages (J39) | unemployment (J64) |
| higher wages (J39) | employment (J68) |