When Hosios Meets Phillips: Connecting Efficiency and Stability to Demand Shocks


Etienne Wasmer

Philippe Weil

Download PDF
(3 MB)

2018-13 | February 1, 2021

In an economy with frictional goods and labor markets there exist a price and a wage that implement the constrained efficient allocation. This price maximizes the marginal revenue of labor, balancing a price and a trading effect on firm revenue, and this wage trades off the benefits of job creation against the cost of turnover in the labor market. We show under bargaining over prices and wages that a double Hosios condition: (i) implements the constrained efficient allocation; (ii) also minimizes the elasticity of labor market tightness and job creation to a demand shock, and; (iii) that the relative response of wages to that of unemployment to changes in demand flattens as workers lose bargaining power, and it is steepest when there is efficient rent sharing in the goods market between consumers and producers, thereby relating changes in the slope of a wage Phillips curve to the constrained efficiency of allocations.

Article Citation

Wasmer, Etienne, Nicolas Petrosky-Nadeau, and Philippe Weil. 2018. “When Hosios Meets Phillips: Connecting Efficiency and Stability to Demand Shocks,” Federal Reserve Bank of San Francisco Working Paper 2018-13. Available at https://doi.org/10.24148/wp2018-13

About the Author
Nicolas Petrosky-Nadeau
Nicolas Petrosky-Nadeau is a vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Nicolas Petrosky-Nadeau