Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144312
Authors: 
De la Croix, David
De Walque, Gregory
Wouters, Rafael
Year of Publication: 
2006
Series/Report no.: 
Working Paper Research 98
Abstract: 
We first build a fair wage model in which effort varies over the business cycle. This mechanism decreases the need for other sources of sluggishness to explain the observed high inflation persistence. Second, we confront empirically our fair wage model with a New Keynesian model based on the standard assumption of monopolistic competition in the labor market. We show that, in terms of overall fit, the fair wage model outperforms the New Keynesian one. The extension of the fair wage model with lagged wage is judged insignificant by the data, but the extension based on a rent sharing argument including firm’s productivity gains in the fair wage is not. Looking at the implications for monetary policy, we conclude that the additional trade-off problem created by the inefficient real wage behavior significantly affects nominal interest rates and inflation outcomes
Subjects: 
Efficiency wage
effort
inflation persistence
monetary policy
JEL: 
E4
E5
Document Type: 
Working Paper

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