A Comparison of Labor Market Equilibria Under Different Institutional Organizations

Abstract

It is a widely accepted “stylized fact” that the United States economy exhibits rigid wages and flexible employment over the business cycle. Hall (1980) and Gordon (1982) document this phenomenon using aggregate time series data. A widely cited example of an economy with a different organization is Japan. There wages are extremely flexible: typically a base wage is renegotiated each year and then supplemented with bonuses depending on profitability, and employment is fairly rigid. Canada and many other countries line up somewhere in between the United States and Japan in the relative flexibility of wages and employment. Stable employment is often taken to be more desirable than stable wages, and the Japanese economy attracts attention as perhaps providing clues about introducing more wage flexibility, and presumably consequently less employment flexibility, into the United States economy.