Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market
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- 1 August 2005
- journal article
- Published by MIT Press in The Review of Economics and Statistics
- Vol. 87 (3) , 397-407
- https://doi.org/10.1162/0034653054638346
Abstract
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, 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. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.Keywords
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