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Monetary Policy, Efficiency Wages, and Nominal Wage Rigidities

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Thomas J. Carter
Abstract

Monetary policy can lower unemployment and have other real effects when efficiency wages are combined with some nominal rigidity. In some models, the rigidity causes a fixed nominal wage. Thus a monetary expansion that raises prices must lower real wages; this can raise employment and output. But one might conclude that at least in their current forms, efficiency wage models with nominal wage rigidities cannot be plausibly applied to monetary issues or used to justify monetary policy. With such rigidities, a monetary expansion lowers real wages, raises employment, and lowers efficiency. This paper uses a general efficiency wage model to reanalyze the effects of monetary policy. Here, a rise in the money supply raises employment but lowers output. This happens because efficiency or productivity falls when the money supply rises. The conclusion to be drawn is not that monetary expansions really are contractionary. Instead, one might conclude that, at least in their current forms, efficiency wage models with nominal wage rigidities may not be well-suited to discussions of monetary policy. Alternative models may be more useful.

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Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 31 (2005)
Issue (Month): 3 (Summer)
Pages: 349-359
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Handle: RePEc:eej:eeconj:v:31:y:2005:i:3:p:349-359

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  1. Martin B. Schmidt, 2000. "Relative Wage Variability: Monetary Policy and the Labor Market," Eastern Economic Journal, Eastern Economic Association, vol. 26(4), pages 439-454, Fall. [Downloadable!]
  2. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December. [Downloadable!] (restricted)
  3. Holmes, James M & Hutton, Patricia A, 1996. "Keynesian Involuntary Unemployment and Sticky Nominal Wages," Economic Journal, Royal Economic Society, vol. 106(439), pages 1564-85, November. [Downloadable!] (restricted)
  4. Wadhwani, S. & Wall, M., 1988. "A Direct Test Of The Efficiency Wage Model Using Uk Micro- Data," Papers 313, London School of Economics - Centre for Labour Economics.
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  5. Gottfries, Nils & Westermark, Andreas, 1998. "Nominal wage contracts and the persistent effects of monetary policy," European Economic Review, Elsevier, vol. 42(2), pages 207-223, February. [Downloadable!] (restricted)
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  6. Miles S. Kimball, 1989. "Labor Market Dynamics When Unemployment Is A Worker Discipline Device," NBER Working Papers 2967, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Green, Francis & Weisskopf, Thomas E, 1990. "The Worker Discipline Effect: A Disaggregative Analysis," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 241-49, May. [Downloadable!] (restricted)
  8. Huang, Tzu-Ling, et al, 1998. "Empirical Tests of Efficiency Wage Models," Economica, London School of Economics and Political Science, vol. 65(257), pages 125-43, February. [Downloadable!] (restricted)
  9. Edward N. Gamber & Frederick L. Joutz, 1997. "Real Wages over the Business Cycle," Eastern Economic Journal, Eastern Economic Association, vol. 23(3), pages 277-291, Summer. [Downloadable!]
  10. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82. [Downloadable!] (restricted)
  11. Spencer, David E, 1998. "The Relative Stickiness of Wages and Prices," Economic Inquiry, Oxford University Press, vol. 36(1), pages 120-37, January.
  12. Joseph E. Stiglitz, 1986. "Theories of Wage Rigidity," NBER Working Papers 1442, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 183-203, April. [Downloadable!] (restricted)
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  14. Brecher, Richard A., 1992. "An efficiency-wage model with explicit monitoring : Unemployment and welfare in an open economy," Journal of International Economics, Elsevier, vol. 32(1-2), pages 179-191, February. [Downloadable!] (restricted)
  15. Agell, Jonas & Lundborg, Per, 1995. "Fair Wages in the Open Economy," Economica, London School of Economics and Political Science, vol. 62(247), pages 335-51, August. [Downloadable!] (restricted)
  16. Palley, Thomas I., 1994. "The fair wage-effort hypothesis: Implications for the distribution of income and dual labor markets," Journal of Economic Behavior & Organization, Elsevier, vol. 24(2), pages 195-205, July. [Downloadable!] (restricted)
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