Wages and the Allocation of Hours and Effort

52 Pages Posted: 29 Mar 2000 Last revised: 5 May 2000

See all articles by Mark Bils

Mark Bils

University of Rochester - Department of Economics; National Bureau of Economic Research (NBER)

Yongsung Chang

University of Rochester - Department of Economics; Yonsei University - Department of Economics

Date Written: August 1999

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.

Suggested Citation

Bils, Mark and Chang, Yongsung, Wages and the Allocation of Hours and Effort (August 1999). NBER Working Paper No. w7309. Available at SSRN: https://ssrn.com/abstract=198028

Mark Bils (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627-0158
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yongsung Chang

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Yonsei University - Department of Economics ( email )

50 Yonsei-Ro
Seoul, 120-749
Korea

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