Theory of Indivisible Labor

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Developed by economist Gary Hansen, the theory of indivisible labor describes wages as "lumpy" in an attempt to supplement RBC theory. Because costs occur in lumps, there is unemployment.

[edit] Example

Consider a company with 100 employees and a recession hits. The owner has two choices to keep his company going.

  1. Move from an eight hour day to a seven hour day and pay accordingly.
  2. Fire 1/8 of all workers.

Companies tend to choose number two because reducing wages is not always feasible. Number one, in fact, is never seriously considered by firms.

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