The efficiency wage hypothesis: A mesoeconomic analysis

Wenli Cheng, Haiyang Xu

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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 firm's expectations. With a modified formulation of the efficiency wage hypothesis and increasing return to scale, 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.

Original languageEnglish
Pages (from-to)257-269
Number of pages13
JournalJournal of Economic Behavior and Organization
Issue number2
Publication statusPublished - 1 Oct 2004
Externally publishedYes


  • Efficiency wage hypothesis
  • Increasing return
  • Mesoeconomics
  • Unemployment

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