The Efficiency Wage Hypothesis: A Mesoeconomic Analysis

In this paper, we apply the mesoeconomic approach to examine the efficiency wage hypothesis. With the traditional formulation of the efficiency wage hypothesis, we show that under certain conditions, the economy has a continuum of equilibria and that nominal shocks can have real effects depending on the firms' expectations. With a modified formulation of the efficiency wage hypothesis, we capture the weak positive correlation between real wage and employment and show that nominal shocks may have real effects in an economy without a continuum of equilibria.