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Wage Bargaining and Employment

by Ian M. McDonald, Robert M. Solow
American Economic Review ()
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One of the perennial problems of business cycle theory has been the search for a convincing empirical description and theoretical explanation of the behavior of wage rates during fluctuations in output and employment. Even the empirical question is hardly settled, although the most recent careful study confirms the prevailing view that real-wage movements are more or less independent of the business cycle. There are really two sub questions here. The first presumes that nominal wage stickiness is the main route by which nominal disturbances have real macroeconomic effects, and asks why nominal wages should be sticky. The second focuses on real wages, and asks why fluctuations in the demand for labor should so often lead to large changes in employment and small, unsystematic, changes in the real wage. Economists address only the second of these sub questions. They do so in the context of explicit bargaining over wages and employment by a trade union and a firm or group of firms, though one could hope that the results might apply loosely even where an informally organized labor pool bargains implicitly with one or more long-time employers.

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