Efficiency Wages

Abstract

This chapter establishes a theoretical relation between the level of unemployment and the economic rate of growth. It is posited that in a model with a monopolistically competitive manufacturing sector and a competitive innovation sector, both of which pay efficiency wages, the equilibrium unemployment rate — the Nawru — exhibits an unambiguously negative impact on the long-run growth performance, because it reduces the innovative capacity of the economy. Only if efficiency levels are different across sectors can a causal relation from the growth rate to the level of unemployment be established, since a lower level of innovation shifts the burden of inducing efficiency towards the manufacturing sector, thus fostering unemployment.