How is marriage like a decision to build a new factory? Which decision is easier to reverse?
Do workers choose to work more because wages are temporarily high and do workers choose to work less because wage are temporarily low? This is key to the "intertemporal substitution" story of this chapter. The following chart shows how much wages change in the short run: Except in the 1970s, the moves are almost always in a 2% range, running from 1% higher than average to 1% lower than average.
So, when wages move up or down for a year or tow, does the number of Americans working move in the same direction at the same time/ Let's see. The economic simulation at the top of the next page is based on actual U.S. data and shows how a 1% rise in wages usually impacts the number of Americans employed. Sometimes the effect is bigger than this, and sometimes smaller, but this is the average.
In practice, a 1% rise in wages apparently causes a 0.2% rise in the number of Americans with jobs. It takes nine months for this to happen.
How much would wages have to rise to raise employment by 1% or 2%, according to these estimates? Is this "wage-channel" effect large enough to explain most of the job fluctuations we see during real-world business cycles?