Monetary Policy, Efficiency Wages, and Nominal Wage Rigidities
Monetary policy can lower unemployment and have other real effects when efficiency wages are combined with some nominal rigidity. In some models, the rigidity causes a fixed nominal wage. Thus a monetary expansion that raises prices must lower real wages; this can raise employment and output. But one might conclude that at least in their current forms, efficiency wage models with nominal wage rigidities cannot be plausibly applied to monetary issues or used to justify monetary policy. With such rigidities, a monetary expansion lowers real wages, raises employment, and lowers efficiency. This paper uses a general efficiency wage model to reanalyze the effects of monetary policy. Here, a rise in the money supply raises employment but lowers output. This happens because efficiency or productivity falls when the money supply rises. The conclusion to be drawn is not that monetary expansions really are contractionary. Instead, one might conclude that, at least in their current forms, efficiency wage models with nominal wage rigidities may not be well-suited to discussions of monetary policy. Alternative models may be more useful.
Volume (Year): 31 (2005)
Issue (Month): 3 (Summer)
|Contact details of provider:|| Postal: |
Phone: (201) 684-7346
Web page: http://www.ramapo.edu/eea/journal.html
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Edward N. Gamber & Frederick L. Joutz, 1997. "Real Wages over the Business Cycle," Eastern Economic Journal, Eastern Economic Association, vol. 23(3), pages 277-291, Summer.
- Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
- Brecher, Richard A., 1992. "An efficiency-wage model with explicit monitoring : Unemployment and welfare in an open economy," Journal of International Economics, Elsevier, vol. 32(1-2), pages 179-191, February.
- 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.
- Holmes, James M & Hutton, Patricia A, 1996. "Keynesian Involuntary Unemployment and Sticky Nominal Wages," Economic Journal, Royal Economic Society, vol. 106(439), pages 1564-85, November.
- Johnson, G.E. & Layard, P.R.G., 1987. "The natural rate of unemployment: Explanation and policy," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 16, pages 921-999 Elsevier.
- Martin B. Schmidt, 2000. "Relative Wage Variability: Monetary Policy and the Labor Market," Eastern Economic Journal, Eastern Economic Association, vol. 26(4), pages 439-454, Fall.
- Huang, Tzu-Ling, et al, 1998. "Empirical Tests of Efficiency Wage Models," Economica, London School of Economics and Political Science, vol. 65(257), pages 125-43, February.
- Green, Francis & Weisskopf, Thomas E, 1990. "The Worker Discipline Effect: A Disaggregative Analysis," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 241-49, May.
- Laurence Ball & David Romer, 1987.
"Real Rigidities and the Non-Neutrality of Money,"
NBER Working Papers
2476, National Bureau of Economic Research, Inc.
- Agell, Jonas & Lundborg, Per, 1995. "Fair Wages in the Open Economy," Economica, London School of Economics and Political Science, vol. 62(247), pages 335-51, August.
- Gottfries, N. & Westermak, A., 1995.
"Nominal Wage Contracts and the Persistent Effects of Monetary Policy,"
1995-22, Uppsala - Working Paper Series.
- Gottfries, Nils & Westermark, Andreas, 1998. "Nominal wage contracts and the persistent effects of monetary policy," European Economic Review, Elsevier, vol. 42(2), pages 207-223, February.
- Miles S. Kimball, 1989.
"Labor Market Dynamics When Unemployment Is A Worker Discipline Device,"
NBER Working Papers
2967, National Bureau of Economic Research, Inc.
- Kimball, Miles S, 1994. "Labor-Market Dynamics When Unemployment is a Worker Discipline Device," American Economic Review, American Economic Association, vol. 84(4), pages 1045-59, September.
- Perri, Timothy J, 1990. "Optimal Minimum Wage Legislation: A Comment," Economic Journal, Royal Economic Society, vol. 100(402), pages 914-17, September.
- Wadhwani, Sushil B & Wall, Martin, 1991.
"A Direct Test of the Efficiency Wage Model Using UK Micro-data,"
Oxford Economic Papers,
Oxford University Press, vol. 43(4), pages 529-48, October.
- Wadhwani, S. & Wall, M., 1988. "A Direct Test Of The Efficiency Wage Model Using Uk Micro- Data," Papers 313, London School of Economics - Centre for Labour Economics.
- Spencer, David E, 1998. "The Relative Stickiness of Wages and Prices," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 120-37, January.
- Joseph E. Stiglitz, 1984. "Theories of Wage Rigidity," NBER Working Papers 1442, National Bureau of Economic Research, Inc.
- Palley, Thomas I., 1994. "The fair wage-effort hypothesis: Implications for the distribution of income and dual labor markets," Journal of Economic Behavior & Organization, Elsevier, vol. 24(2), pages 195-205, July.
When requesting a correction, please mention this item's handle: RePEc:eej:eeconj:v:31:y:2005:i:3:p:349-359. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Victor Matheson, College of the Holy Cross)
If references are entirely missing, you can add them using this form.