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Efficiency Wages and the Business Cycle

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  • Canton, E.

    (Tilburg University, Center for Economic Research)

Abstract

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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1995-31.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:199531

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  1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, October.
  2. Ricardo J. Caballero & Eduardo Engel & John Haltiwanger, 1996. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," Documentos de Trabajo 6, Centro de Economía Aplicada, Universidad de Chile.
  3. N. Gregory Mankiw, 1989. "Real Business Cycles: A New Keynesian Perspective," NBER Working Papers 2882, National Bureau of Economic Research, Inc.
  4. Jeremy I. Bulow & Lawrence H. Summers, 1985. "A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination and Keynesian Unemployment," NBER Working Papers 1666, National Bureau of Economic Research, Inc.
  5. Jean-Pierre DANTHINE & John B. DONALDSON, 1991. "Methodological and Empirical Issues in Real Business Cycle Theory," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9102, Université de Lausanne, Faculté des HEC, DEEP.
  6. Van De Klundert, Th., 1990. "On socioeconomic causes of 'wait unemployment'," European Economic Review, Elsevier, vol. 34(5), pages 1011-1022, July.
  7. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
  8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  9. Kimball, Miles S, 1994. "Labor-Market Dynamics When Unemployment is a Worker Discipline Device," American Economic Review, American Economic Association, vol. 84(4), pages 1045-59, September.
  10. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  11. Hahn, F H, 1987. "On Involuntary Unemployment," Economic Journal, Royal Economic Society, vol. 97(388a), pages 1-16, Supplemen.
  12. George W. Stadler, 1994. "Real Business Cycles," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1750-1783, December.
  13. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1990. "Labor Hoarding and the Business Cycle," NBER Working Papers 3556, National Bureau of Economic Research, Inc.
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