Efficiency wages, unemployment and macroeconomic policy

Jim Malley, Hassan Molana

    Research output: Working paperDiscussion paper

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    We construct a stylised macro-model with goods and labour market imperfections to show that the economy can rationally operate at an inefficient, or ‘low-effort’, equilibrium in the neighbourhood of which the relationship between output and unemployment is, in contrast to Okun’s Law, positive. We use the Kalman-filter approach allowing for trends, cyclical changes and breaks to examine data from the G7 countries over period 1960-2001, and find that only German data strongly favour a persistent negative relationship between the level of output and rate of unemployment. Our results suggest that circumstances exist in which market imperfections pose serious obstacles to the smooth working of expansionary and/or stabilization policies.
    Original languageEnglish
    PublisherUniversity of Dundee
    Publication statusPublished - 2002

    Publication series

    NameDundee Discussion Papers in Economics
    PublisherUniversity of Dundee
    ISSN (Print)1473-236X


    • Efficiency wages
    • Effort supply
    • Monopolistic competition
    • Multiple equilibria
    • Fiscal multiplier
    • Kalman filter

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