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The Relationship between Output and Unemployment with Efficiency Wages

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  • Jim Malley
  • Hassan Molana

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.

Suggested Citation

  • Jim Malley & Hassan Molana, 2006. "The Relationship between Output and Unemployment with Efficiency Wages," CDMA Conference Paper Series 0607, Centre for Dynamic Macroeconomic Analysis.
    • Handle: RePEc:san:cdmacp:0607
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    File URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0607.pdf
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    References listed on IDEAS

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    Cited by:

    1. Benos, Nikos & Stavrakoudis, Athanassios, 2022. "Okun's law: Copula-based evidence from G7 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 478-491.
    2. 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.
    3. Kristina Matuzeviciute & Mindaugas Butkus & Akvile Karaliute, 2017. "Do Technological Innovations Affect Unemployment? Some Empirical Evidence from European Countries," Economies, MDPI, vol. 5(4), pages 1-19, December.

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    More about this item

    Keywords

    Efficiency wages; effort supply; Kalman filter; monopolistic competition; Okun’s law.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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