Munich Personal RePEc Archive

Wage, Productivity and Unemployment Microeconomics Theory and Macroeconomic Data

Razzak, Weshah (2014): Wage, Productivity and Unemployment Microeconomics Theory and Macroeconomic Data.

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Abstract

We confront microeconomic theory with macroeconomic data. Unemployment results from two main micro-level decisions of workers and firms. Most of the efficiency wage and bargaining theories predict that over the business cycle, unemployment falls below its natural rate when the worker’s real wage exceeds the reservation wage. However, these theories have weak empirical support. Firm’s decision predicts that when the worker’s real wage exceeds the marginal product of labor, unemployment increases above its natural rate. Accounting for this microeconomic decision helps explain almost all the fluctuations of U.S. unemployment.

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