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Effort and the Cycle: Cyclical Implications of Efficiency Wages

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  • Uhlig, H.F.H.V.S.
  • Xu, Y.

    (Tilburg University, Center for Economic Research)

Abstract

A number of authors have proposed theories of efficiency wages to explain the behaviour of aggregate labor markets. According to these theories, firms do not adjust wages downwards despite available unemployed job seekers, because lower wages would induce hired workers to shirk more often, which in turn would be counterproductive for the firm. Efficiency wage theories thus aid in explaining, why \involuntary" unemployment can persist. According to one popular version by Shapiro and Stiglitz (1984), it is precisely the threat of unemployment which induces workers to provide effort. The purpose of this paper is to examine the cyclical consequences of an efficiency wage theory, when effort is an adjustable variable. To that end, we ex- amine such a theory in the context of a dynamic real business cycle framework. The paper shows, that increasing the variability of effort due to efficiency wage consideration helps in explaining the rather large cyclical employment move- ments as well as the rather low cyclical movements in real wages, supporting the point made by Solow (1979), but require unplausibly large movements in the technology parameter. Because of the latter aspect, we argue that adjustable effort due to effciency wage considerations is unlikely to play an important role for understanding business cycles.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1996-49.

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Date of creation: 1996
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Handle: RePEc:dgr:kubcen:199649

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

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References

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  1. Fay, Jon A & Medoff, James L, 1985. "Labor and Output over the Business Cycle: Some Direct Evidence," American Economic Review, American Economic Association, vol. 75(4), pages 638-55, September.
  2. Burda, Michael & Wyplosz, Charles, 1994. "Gross worker and job flows in Europe," European Economic Review, Elsevier, vol. 38(6), pages 1287-1315, June.
  3. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  4. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-50, June.
  5. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1993. "Labor Hoarding and the Business Cycle," NBER Working Papers 3556, National Bureau of Economic Research, Inc.
  6. Danthine, Jean-Pierre & Donaldson, John B., 1990. "Efficiency wages and the business cycle puzzle," European Economic Review, Elsevier, vol. 34(7), pages 1275-1301, November.
  7. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
  8. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  9. Ben S. Bernanke & Martin L. Parkinson, 1990. "Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries," NBER Working Papers 3503, National Bureau of Economic Research, Inc.
  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  11. Danthine, J.P. & Donaldson, J.B., 1993. "Non-Walrassian Economies," Papers 93-02, Columbia - Graduate School of Business.
  12. Rogerson, Richard & Wright, Randall, 1988. "Involuntary unemployment in economies with efficient risk sharing," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 501-515.
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Citations

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Cited by:
  1. Jean-Pierre Danthine & André Kurmann, 2003. "Fair Wages in a New Keynesian Model of the Business Cycle," Cahiers de recherche 0320, CIRPEE.
  2. Collard, Fabrice & de la Croix, David, 1996. "Gift exchange and the business cycle: the fair wage strikes back," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1997008, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Apr 1997.
  3. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 1995-97, Tilburg University, Center for Economic Research.
  4. Guerrazzi, Marco, 2012. "On involuntary unemployment: notes on efficiency-wage competition," MPRA Paper 38140, University Library of Munich, Germany.
  5. Jean-Michel Grandmont, 2006. "Negishi-Solow Efficiency Wages, Unemployment Insurance and Dynamic Deterministic Indeterminacy," Working Papers 2006_60, Department of Economics, University of Venice "Ca' Foscari".
  6. Kiley, Michael T., 1997. "Efficiency wages, nominal rigidities and the cyclical behavior of real wages and marginal cost," Economics Letters, Elsevier, vol. 56(2), pages 215-221, October.

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