Wages and the Allocation of Hours and Effort

Mark Joseph Bils and Yongsung Chang ()

No 7309, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the impact of wage stickiness when employment has an effort as well as hours dimension. Despite wages being predetermined, the labor market clears through the effort margin. We compare this model quantitatively to models with flexible and sticky wages, but no effort margin. Allowing for responses in effort dramatically improves the ability of a sticky-wage model to mimic U.S. business cycles. The model produces fluctuations in hours that are intermediate to the standard flexible-wage and sticky-wage models; but output and consumption behave much like in the flexible-wage economy. Consequently, welfare costs of wage stickiness are potentially much, much smaller if one entertains an effort dimension.

JEL-codes: E3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lab, nep-pbe, nep-pke and nep-pub
Date: 1999-08
Note: EFG
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