Countercyclical Endogenous Uncertainty Shocks, Efficiency Wages and Procyclical Precautionary Labor Productivity
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, frms' efficiency wage contracts generate significant endogenous procyclical variations of effort, employment and labor productivity, in particular when the capital-efficient labor elasticity of substitution is smaller than and close to 1.
Efficiency wages, Unemployment, Expectation driven business cycles, Conditionally heteroskedastic sunspots, Countercyclical uncertainty shocks, Prudence, Procyclical labor effort and productivity
E00, E24, E32, J41
ICEF, Department of Economics, University Cà Foscari di Venezia at San Giobbe, Italy,
CREST (EXCESS, UMR CNRS 9194), University of Paris-Saclay, France,
Research Institute for Economics and Business Administration
Rokkodai-cho, Nada-ku, Kobe