TITLE:
An Efficiency Wage—Imperfect Information Model of the Phillips Curve
AUTHORS:
Carl M. Campbell III
KEYWORDS:
Phillips Curve, Efficiency Wages, Imperfect Information
JOURNAL NAME:
Open Journal of Social Sciences,
Vol.5 No.2,
January
25,
2017
ABSTRACT: This study develops an efficiency wage model in which workers have imperfect information about wages elsewhere. Firms’ profit-maximizing behavior results in a Phillips curve relationship. Three types of Phillips curves are derived: a wage-wage Phillips curve, a wage-price Phillips curve, and a price-price Phillips curve. The wage-wage Phillips curve is a reduced form relationship with the coefficient on lagged wage inflation equaling 1. To obtain the wage-price and the price-price Phillips curves, stochastic shocks to the growth rate of demand are modeled, yielding expressions over time for wage inflation, price inflation, and unemployment. These expressions are used in a regression of current wage or price inflation on unemployment and lagged price inflation, and it is demonstrated that the coefficient on lagged inflation asymptotically approaches 1. In addition, the model predicts that real wages are strictly procyclical in response to technology shocks, but can be either procyclical, acyclical, or countercyclical in response to demand shocks. Thus, this study can explain why economists have reached different conclusions about the cyclical behavior of real wages.