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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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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2002_3.

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Date of creation: Mar 2002
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Handle: RePEc:gla:glaewp:2002_3

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Web page: http://www.gla.ac.uk/schools/business/research/
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Keywords: Efficiency wages; effort supply; monopolistic competition; multiple equilibria; stability; fiscal multiplier;

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  27. Albrecht, James W. & Vroman, Susan B., 1996. "A note on the long-run properties of the shirking model," Labour Economics, Elsevier, vol. 3(2), pages 189-195, September.
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  29. Heijdra , B.J. & Ligthart, J.E. & Ploeg, F. van der, 1998. "Fiscal policy, distortionary taxation, and direct crowding out under monopolistic competition," Open Access publications from Tilburg University urn:nbn:nl:ui:12-376256, Tilburg University.
  30. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
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