Efficiency Wages and the Business Cycle

E.J.F. Canton

    Research output: Working paperDiscussion paperOther research output

    249 Downloads (Pure)

    Abstract

    This paper presents a simple efficiency wage model to explain the transmission from exogenous productivity shocks to levels of economic activity. Higher real wages and rising unemployment induce workers to increase their effort. The disciplining effect of unemployment on the effort level has an upper and a lower limit. Mild productivity shocks produce unemployment fluctuations within these limits, so that firms will change the real wage rate to keep effort constant. Wild shocks hit these limits so that the disciplining effect becomes invariant to changes in unemployment, and real wages are held constant by the firm. By-and-large, the impact of mild (wild) shocks on the production level is mitigated (reinforced). Finally, the economy with profit-maximizing firms is compared with the economy where firms are managerially controlled and managers seek to maximize output.
    Original languageEnglish
    PublisherCentER, Center for Economic Research
    Volume1995-31
    Publication statusPublished - 1995

    Publication series

    NameCentER Discussion Paper
    Volume1995-31

    Fingerprint Dive into the research topics of 'Efficiency Wages and the Business Cycle'. Together they form a unique fingerprint.

    Cite this