The relationship between output and unemployment with efficiency wages

Jim Malley, Hassan Molana

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    Abstract

    We construct a stylised model of the supply side with goods and labour market imperfections to show that an economy can rationally operate at a low-effort state in which the relationship between output and unemployment is positive. We examine data from the G7 countries over 1960–2001 and find that only German data strongly favour a persistent negative relationship between the level of output and rate of unemployment. The consequence of this is that circumstances exist in which market imperfections could pose serious obstacles to the smooth working of expansionary and/or stabilisation policies and a positive demand shock might have adverse effects on employment.
    Original languageEnglish
    Pages (from-to)561-577
    Number of pages17
    JournalGerman Economic Review
    Volume8
    Issue number4
    DOIs
    Publication statusPublished - 2007

    Keywords

    • Efficiency wages
    • Effort supply
    • Kalman filter
    • Monopolistic competition
    • Okun's law

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