The Relationship between Output and Unemployment with Efficiency Wages
AbstractWe 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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Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0607.
Date of creation: Sep 2006
Date of revision:
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Efficiency wages; effort supply; Kalman filter; monopolistic competition; Okun’s law.;
Other versions of this item:
- Jim Malley & Hassan Molana, 2007. "The Relationship between Output and Unemployment with Efficiency Wages," German Economic Review, Verein für Socialpolitik, vol. 8, pages 561-577, November.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-14 (All new papers)
- NEP-LAB-2006-10-14 (Labour Economics)
- NEP-MAC-2006-10-14 (Macroeconomics)
- NEP-PBE-2006-10-14 (Public Economics)
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