Wage Flexibility and Employment Stability

J S Flemming

Oxford Economic Papers, 1987, vol. 39, issue 1, 161-74

Abstract: How is the variance of employment affected by the speed of response of money wages to labor market disequilibrium? This is considered in a model which, apart from partial adjustment of the wage, is neoclassical, including rational expectations. Output is determined by demand which, like supply, is subject to shocks which affect employment. A faster wage response increases the impact of shocks on employment. In some cases this outweighs the effect of speedier equilibration, supporting an assertion of Keynes's. Since the nominal wage that is given in the short-run monetary policy is important, several variants are considered. Copyright 1987 by Royal Economic Society.

Date: 1987
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