Endogenous Procyclicality of Labor Productivity, Employment, Real Wages and Effort in Conditionally Heteroskedastic Sunspots Unemployment Business Cycles with Negishi-Solow Efficiency Wages

Jean-Michel Grandmont ()

No 2016:10, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: This work introduces a new mechanism that is able to generate procyclical comovements of aggregate labor productivity, employment and real wages, through endogenous variations of workers' effort, in a simple model involving structural unemployment, efficiency wages, financial market imperfections and expectations driven conditionally heteroskedastic sunspots business cycles, near a locally indeterminate steady state. Owing to imperfect effort monitoring, workers' effort level equates their disutility of effort to their expected utility gain of not shirking, in terms of their earned real income, and of the resulting anticipated random consumption. A positive current (consumption) sunspot shock generates a countercyclical uncertainty shock, i.e. a drecrease of the anticipated sunspot volatility, and makes risk averse workers more willing to provide "precautionary effort" by increasing their expected utility gain of not shirking. If workers' relative prudence is small and decreasing fast near the steady state, profit maximizing firms' choice of efficiency wage contracts generates significant endogenous procyclical variations of effort and employment, in particular when the capital-efficient labor elasticity of substitution is smaller than 1.

Keywords: efficiency wages; unemployment; expectation driven business cycles; conditionally heteroskedastic sunspots; countercyclical uncertainty shocks; prudence; procyclical labor effort and productivity (search for similar items in EconPapers)
JEL-codes: E00 E24 E32 J41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Working Paper: Endogenous Procyclicality of Labor Productivity, Employment, Real Wages and Effort in Conditionally Heteroskedastic Sunspots Unemployment Business Cycles with Negishi-Solow Efficiency Wages (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ven:wpaper:2016:10

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