NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Labor-Market Frictions and Employment Fluctuations

Robert E. Hall

NBER Working Paper No. 6501
Issued in April 1998
NBER Program(s):   EFG

The labor market occupies center stage in modern theories of fluctuations. The most important phenomenon to explain and understand in a recession is the sharp decline in employment and jump in unemployment. This chapter for the Handbook of Macroeconomics considers explanations based on frictions in the labor market. Earlier research within the real business cycle paradigm considered frictionless labor markets where fluctuations in the volume of work effort represented substitution by households between work in the market and activities at home. A preliminary section of the chapter discusses why frictionless models are incomplete they fail to account for either the magnitude or persistence of fluctuations in employment. And the frictionless models fail completely to describe unemployment. The evidence suggests strongly that consideration of unemployment as a third use of time is critical for a realistic model. The two elements of a theory of unemployment are a mechanism for workers to lose or leave their jobs and an explanation for the time required for them to find new jobs. Theories of mechanism design or of continuous re-bargaining of employment terms provide the first. The theory of job search together with efficiency wages and related issues provides the second. Modern macro models incorporating these features come much closer than their predecessors to realistic and rigorous explanations of the magnitude and persistence of fluctuations.

download in pdf format
   (2058 K)

email paper

This paper is available as PDF (2058 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Hall, Robert E., 1999. "Labor-market frictions and employment fluctuations," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 17, pages 1137-1170 Elsevier.

Users who downloaded this paper also downloaded these:
Hall w9967 Wage Determination and Employment Fluctuations
Caballero w6264 Aggregate Investment
Hall Labor Demand, Labor Supply, and Employment Volatility
Shimer w9536 The Cyclical Behavior of Equilibrium Unemployment and Vacancies: Evidence and Theory
Calvo and Vegh w6925 Inflation Stabilization and BOP Crises in Developing Countries
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us