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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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Web page: http://center.uvt.nl

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  1. Mankiw, N Gregory, 1989. "Real Business Cycles: A New Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 79-90, Summer.
  2. Pierre Danthine, Jean & Donaldson, John B., 1993. "Methodological and empirical issues in real business cycle theory," European Economic Review, Elsevier, vol. 37(1), pages 1-35, January.
  3. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
  4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  5. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  6. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-73, April.
  7. 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.
  8. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-37, March.
  9. Van De Klundert, Th., 1990. "On socioeconomic causes of 'wait unemployment'," European Economic Review, Elsevier, vol. 34(5), pages 1011-1022, July.
  10. Miles S. Kimball, 1989. "Labor Market Dynamics When Unemployment Is A Worker Discipline Device," NBER Working Papers 2967, National Bureau of Economic Research, Inc.
  11. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, September.
  12. George W. Stadler, 1994. "Real Business Cycles," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1750-1783, December.
  13. Hahn, F H, 1987. "On Involuntary Unemployment," Economic Journal, Royal Economic Society, vol. 97(388a), pages 1-16, Supplemen.
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