A Business Cycle Model Based on Efficiency Wages, Monopolistic Competition and Nondecreasing Returns

Weinrich, Gerd (1993): A Business Cycle Model Based on Efficiency Wages, Monopolistic Competition and Nondecreasing Returns. Published in: Economic Notes , Vol. 22, (1993): pp. 535-551.

Abstract

A model is analyzed in which workers' efforts depend positively on the real wage and the unemployment rate. Due to isoelastic demand and constant marginal cost it is optimal for firms to set the output price as a fixed markup over the nominal wage. When demand shocks occur, firms' first response is therefore to adjust output and employment. But as the unemployment rate changes, the efficient real wage changes too. This causes firms to adjust their nominal wages and prices which in turn implies a revision of labour input and goods output. The resulting dynamics is capable of generating counterclockwise movements in the output-inflation-plane. This is illustrated in an example in which size and length of the business cycle depend on the responsiveness of effort to changes in the unemploymentrate.

• Item Type: MPRA Paper
• Language: English
• Keywords: business cycle, efficiency wages, monopolistic competition
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection