Zero is too low, but an inflation target of 2% may allow enough room for both wage flexibility and low interest rates.
The U.S. has labor mobility, wage flexibility, capital and product market liberalization, and the government offers help when regions are most in need.
Many economists argue that floating exchange rates will substitute for price and wage flexibility.
Unilateral adoption of a hard currency (dollarization or euroization) tends to be counterproductive unless it is supported by fiscal discipline and wage flexibility.
To trim costs and introduce more wage flexibility, however, companies have been hiring temporary workers to the satisfaction of the agencies that place them.
The second chart, also using data from the Bank of England and the BLS, presents a possible explanation: wage flexibility.
Wage flexibility is the determination of pay levels based on demand and the individual costs of employment, rather than on a collective basis.
In this paper, we document the evolution of wage rigidities over time in Italy and we find that during the recent recession wage flexibility has increased.
In fact, in this model, the job creation condition depends on the difference between the expected productivity and cost of labour in new matches, while the level of wage flexibility in ongoing jobs becomes irrelevant.
It's like the argument about wage flexibility, which I've addressed many times in this blog: downward flexibility of wages does nothing helpful when you're in a liquidity trap, and cost increases do no harm.
