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Efficiency Wages, Unemployment and Macroeconomic Policy

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  • Jim Malley
  • Hassan Molana

Abstract

We provide empirical evidence from a number of European countries, which shows that unemployment and output are positively related when unemployment is low and inversely related when unemployment is high. We then construct a stylised macro-model with goods and labour market imperfections to show that the economy can rationally operate at an inefficient equilibrium in the neighbourhood of which the relationship between output and unemployment is positive. Our results suggest that circumstances exist in which market imperfections pose serious obstacles to the smooth working of expansionary and/or stabilization policies whose final aim is to improve welfare.

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File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_126.pdf
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Bibliographic Info

Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 126.

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Date of creation: Aug 2002
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Handle: RePEc:dun:dpaper:126

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Postal: Dundee, DD1 4HN
Phone: (01382) 344375
Fax: (01382) 344691
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Web page: http://www.dundee.ac.uk/econman/
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  23. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," NBER Working Papers 7352, National Bureau of Economic Research, Inc.
  24. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
  25. Schmidt-Sorensen, Jan Beyer, 1990. "The equilibrium effort-wage elasticity in efficiency-wage models," Economics Letters, Elsevier, vol. 32(4), pages 365-369, April.
  26. Xavier Sala-i-Martin, 1995. "A positive theory of social security," Economics Working Papers 108, Department of Economics and Business, Universitat Pompeu Fabra.
  27. 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.
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