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Efficiency wages and the balanced budget theorem

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  • Wen-Ya Chang
  • Ching-Chong Lai

Abstract

Macroeconomic literature has long agreed that the balanced budget multiplier is positive. By adopting the principal tenets of efficiency wage theories, this paper makes a new attempt to examine the validity of the balanced budget theorem. It is found that the impact of an expansion in government spending on output with a balanced government budget will definitely be contractionary in the presence of the efficiency wage consideration. Further, this paper also examines the role of alternative wage indexation rules on the validity of the balanced budget theorem. It is shown that the balanced budget theorem is not tenable when there is full indexation of wages. Copyright International Atlantic Economic Society 1999

Suggested Citation

  • Wen-Ya Chang & Ching-Chong Lai, 1999. "Efficiency wages and the balanced budget theorem," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 27(3), pages 314-324, September.
    • Handle: RePEc:kap:atlecj:v:27:y:1999:i:3:p:314-324
    DOI: 10.1007/BF02299581
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    References listed on IDEAS

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    Cited by:

    1. João Ricardo Faria, 2004. "The Effects Of Taxes On Labour In A Dynamic Efficiency Wage Model," The Japanese Economic Review, Japanese Economic Association, vol. 55(3), pages 286-297, September.

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