This paper synthesizes the shirking and the matching approaches of equilibrium unemployment in order to endogenize the wage formation process as a function of labour market conditions. The steady state equilibrium can take two forms depending on wether the no-shirking condition is binding or not. It is demonstrated that the efficiency wage approach is relevant when the unemployment rate is above a certain threshold. Futhermore, an efficiency wage is more likely when the disutility of effort is high, recruiting costs and workers' bargaining power are low, inspections are unlikely and the workers' productivity is weak.
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Length: 23 pages Date of creation: Mar 2000 Date of revision: Publication status: Published in Labor Economics, vol. 8 (1), Feb. 2001, pp. 75-102 Handle: RePEc:lau:crdeep:00.07
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