This paper presents a simple efficiency wage model to explain the transmission from exogenous productivity shocks to levels of economic activity. Higher real wages and rising unemployment induce workers to increase their effort. The disciplining effect of unemployment on the effort level has an upper and a lower limit. Mild productivity shocks produce unemployment fluctuations within these limits, so that firms will change the real wage rate to keep effort constant. Wild shocks hit these limits so that the disciplining effect becomes invariant to changes in unemployment, and real wages are held constant by the firm. By-and-large, the impact of mild (wild) shocks on the production level is mitigated (reinforced). Finally, the economy with profit-maximizing firms is compared with the economy where firms are managerially controlled and managers seek to maximize output.
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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
31.
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Find related papers by JEL classification: E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
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