Countercyclical Endogenous Uncertainty Shocks, Efficiency Wages and Procyclical Precautionary Labor Productivity

Jean-Michel Grandmont ()

No 2017:25, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: This work introduces a new mechanism generating procyclical comovements of labor productivity, employment, through endogenous variations of workers' effort, in a simple model with efficiency wages, near a locally indeterminate steady state. A current endogenous countercyclical uncertainty shock makes risk averse workers more willing to provide imperfectly monitored "precautionary effort" by increasing their expected utility gain of not shirking. If workers' relative prudence is small and decreasing fast near the steady state, firms' efficiency wage contracts generate significant endogenous procyclical variations of effort, employment and labor productivity, in particular when the capital-efficient labor elasticity of substitution is smaller than and close to 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: D81 D84 E10 E24 E32 J30 J41 (search for similar items in EconPapers)
Pages: 33 pages
New Economics Papers: this item is included in nep-lma, nep-mac and nep-upt
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Related works:
Working Paper: Countercyclical Endogenous Uncertainty Shocks, Efficiency Wages and Procyclical Precautionary Labor Productivity (2017)
Working Paper: Countercyclical Endogenous Uncertainty Shocks, Efficiency Wages and Procyclical Precautionary Labor Productivity (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ven:wpaper:2017:25

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