NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market

Robert E. Hall

NBER Working Paper No. 11183
Issued in March 2005
NBER Program(s):   EFG   LS   PR

I consider three views of the labor market. In the first, wages are flexible and employment follows the principle of bilateral efficiency. Workers never lose their jobs because of sticky wages. In the second view, wages are sticky and inefficient layoffs do occur. In the third, wages are also sticky, but employment governance is efficient. I show that the behavior of flows in the labor market strongly favors the third view. In the modern U.S. economy, recessions do not begin with a burst of layoffs. Unemployment rises because jobs are hard to find, not because an unusual number of people are thrown into unemployment.

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Published: Hall, Robert E. “Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market.” Review of Economics and Statistics 87, 3 (August 2005): 397-407.

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