The Relationship between Output and Unemployment with Efficiency Wages

Jim Malley () and Hassan Molana

CDMA Conference Paper Series from Centre for Dynamic Macroeconomic Analysis

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.

Keywords: Efficiency wages; effort supply; Kalman filter; monopolistic competition; Okun’s law. (search for similar items in EconPapers)
JEL-codes: E62 J41 H3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab, nep-mac and nep-pbe
Date: 2006-09
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Journal Article: The Relationship between Output and Unemployment with Efficiency Wages (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:san:cdmacp:0607

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