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Endogenous employment rate in the efficiency wage shirking approach

Fabio D'Orlando

International Advances in Economic Research, 2004, vol. 10, issue 2, 113-122

Abstract: The aim of New Keynesian theorists is to obtain Keynesian results on the basis of maximizing behavior. Accordingly, the New Keynesian shirking models depict a world of fully rational maximizing agents where equilibrium unemployment is the main consequence of the payment of efficiency wages. The problem is that oversimplified nature of most shirking models has until now prevented a full investigation of the interdependence of unemployment, the effort supplied by workers and labor demand. This article shows that the existence of this interdependence weakens the whole approach. In particular, when the unemployment rate is considered a truly endogenous variable, the stability of the macroeconomic equilibrium is generally incompatible with the existence of unemployment ascribed to the fact that firms pay efficiency wages. Copyright International Atlantic Economic Society 2004

Date: 2004
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DOI: 10.1007/BF02295674

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Handle: RePEc:kap:iaecre:v:10:y:2004:i:2:p:113-122:10.1007/bf02295674