The Relationship between Output and Unemployment with Efficiency Wages

Jim Malley and Hassan Molana

German Economic Review, 2007, vol. 8, issue 4, 561-577

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 a 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 stabilisation 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)
Date: 2007
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DOI: 10.1111/j.1468-0475.2007.00418.x

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