A Flexible-Wage Efficiency-Wage Model with Involuntary Unemployment

This paper develops a gifts exchange efficiency wage model in which unions and employers bargain over wages and productivity norms. Unlike other efficiency wage models, involuntary unemployment does not depend on wage rigidity. Rather, in keeping with Keynes, insufficient aggregate demand is assumed to create involuntary unemployment, even in light of wage flexibility. Furthermore, the model's assumptions and predictions are consistent with a number of stylized facts of the business cycle. Finally, unlike other gift exchange models, this model's solutions lack Pareto optimality.