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Countercyclical Endogenous Uncertainty Shocks, Efficiency Wages and Procyclical Precautionary Labor Productivity

Author

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  • Jean-Michel Grandmont

    (ICEF; Department of Economics, University Ca’ Foscari di Venezia; CREST; RIEB Fellow; University of Kobe)

Abstract
This work introduces a new mechanism generating procyclical comovements of labor productivity, employment, through endogenous variations of workers' effort, in a simple model with efficiency wages, near a locally indeterminate steady state. A current endogenous countercyclical uncertainty shock makes risk averse workers more willing to provide imperfectly monitored "precautionary effort" by increasing their expected utility gain of not shirking. If workers' relative prudence is small and decreasing fast near the steady state, firms' efficiency wage contracts generate significant endogenous procyclical variations of effort, employment and labor productivity, in particularwhen the capital-efficient labor elasticity of substitution is smaller than and close to 1.

Suggested Citation

  • Jean-Michel Grandmont, 2017. "Countercyclical Endogenous Uncertainty Shocks, Efficiency Wages and Procyclical Precautionary Labor Productivity," Working Papers 2017-12, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2017-12
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    References listed on IDEAS

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    More about this item

    Keywords

    efficiency wages; unemployment; expectation driven business cycles; conditionally heteroskedastic sunspots; countercyclical uncertainty shocks; prudence; procyclical labor effort and productivity;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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