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The Relationship between Output and Unemployment with Efficiency Wages

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  • Jim Malley
  • Hassan Molana

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Abstract

We construct a stylised model of the supply side with goods and labour market imperfections to show that an economy can rationally operate at an inefficient, or ‘low-effort’, state in which the relationship between output and unemployment is positive. We examine data from the G7 countries over 1960-2001 and find that only German data strongly favour a persistent negative relationship between the level of output and rate of unemployment. The consequence of this is that circumstances exist in which market imperfections could pose serious obstacles to the smooth working of expansionary and/or stabilization policies and a positive demand shock might have adverse effects on employment.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0607.pdf
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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0607.

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Date of creation: Sep 2006
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Handle: RePEc:san:cdmacp:0607

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Web page: http://www.st-andrews.ac.uk/cdma
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Keywords: Efficiency wages; effort supply; Kalman filter; monopolistic competition; Okun’s law.;

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  1. Gordon, Robert J, 1995. "Is There a Trade-off between Unemployment and Productivity Growth?," CEPR Discussion Papers 1159, C.E.P.R. Discussion Papers.
  2. Carlin, Wendy & Soskice, David, 2005. "Macroeconomics: Imperfections, Institutions, and Policies," OUP Catalogue, Oxford University Press, number 9780198776222.
  3. Acemoglu, Daron & Shimer, Robert, 2000. "Productivity gains from unemployment insurance," European Economic Review, Elsevier, vol. 44(7), pages 1195-1224, June.
  4. STROBL, Eric & WALSH, Frank, 2003. "Estimating the shirking model with variable effort," CORE Discussion Papers 2003075, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Jim Malley & Hassan Molana, 2001. "Monopolistic Competition, Efficiency Wages and Perverse Effects of Demand Shock," CESifo Working Paper Series 475, CESifo Group Munich.
  6. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 47-104, 04.
  7. Disney, Richard F & Haskel, Jonathan & Heden, Ylva, 2000. "Restructuring And Productivity Growth In UK Manufacturing," CEPR Discussion Papers 2463, C.E.P.R. Discussion Papers.
  8. Jim Malley & Thomas Moutos, . "Capital Accumulation and Unemployment: A Tale of Two 'Continents'," Working Papers 9820, Business School - Economics, University of Glasgow.
  9. Alison L. Booth & Yu-Fu Chen & Gylfi Zoega, 2002. "Hiring and Firing: A Tale of Two Thresholds," Journal of Labor Economics, University of Chicago Press, vol. 20(2), pages 217-248, Part.
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Cited by:
  1. alamro, Hassan & Al-dalaien, Qusay, 2014. "Modeling the relationship between GDP and unemployment for Okun’s law specific to Jordan," MPRA Paper 55302, University Library of Munich, Germany.

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