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Efficiency wage setting, labor demand, and Phillips curve microfoundations

Campbell, Carl (2011): Efficiency wage setting, labor demand, and Phillips curve microfoundations.

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Abstract

This study demonstrates that a model with efficiency wages and imperfect information produces a Phillips curve relationship. Equations are derived for labor demand and the efficiency wage-setting condition, and shifts in these curves in response to aggregate demand shocks result in a relationship with the characteristics of a Phillips curve. The Phillips curve differs from the efficiency wage-setting condition in that the Phillips curve is a more parsimonious expression and has a coefficient on expected inflation equal to 1. Also derived from this model is the counterpart curve to the Phillips curve in unemployment – inflation space.

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