Do workers choose to work more because wages are temporarily high and do workers choose to work less because wages are temporarily low? This is key to the €œintertemporal 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 two, does the number of Americans working move in the same direction at the same time? Let€™s see. The following economic simulation, based on actual U.S. data, 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? (This is roughly how much employment rises during a boom.) Is this €œwage-channel€ effect large enough to explain most of the job fluctuations we see during real-world business cycles?
Question Continue In Next Page.

Real wage from trend 3% . 2% 1% 0% -2% -3% 65 70 75 80 85 90 95 00 05 Year Change in employment 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% 12 3 4 5 67 8 9 1011 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Months since rise in wages