Money and efficiency wages: The neglected effect of employment on efficiency.Faculty Publications
AbstractThe real effects of monetary shocks cannot be explained using current efficiency wage models. In these models, wage rigidities can cause money to have real effects, but not plausible real effects. This paper uses published empirical results to show that in a general efficiency wage model, monetary shocks have perverse effects, such as countercyclical employment. Empirically, the negative impact of employment on efficiency is so strong that output falls when monetary shocks cause employment to rise. Employment and output rise together only if real wages rise a greater proportion than either. Alternative models, involving worker perceptions of fairness, are suggested.
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Citation InformationCarter, T. J. (2005). Money and efficiency wages: The neglected effect of employment on efficiency. Journal of Socio-Economics, 34(2), 199-209. doi:10.1016/j.socec.2004.09.007