NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Wage Determination and Employment Fluctuations

Robert E. Hall

NBER Working Paper No. 9967
Issued in September 2003
NBER Program(s):   EFG   LS

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.

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Published: Hall, Robert E. "Employment Fluctuations With Equilibrium Wage Stickiness," American Economic Review, 2005, v95(1,Mar), 50-65.

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