Abstract
Efficiency wage theories are generalized to include choice of effective working hours per worker, so costs of eliciting effort depends on an employee's relative utility and aggregate unemployment. In Nash equilibrium, state-dependent hours, wages and employment imply unemployment in ‘bad’ states. Deferred compensation and worksharing represent alternatives with most relevance in Japan, but West German unemployment seems to depend mainly on excessive wages (and non-wage costs) for service sector and unskilled workers, as well as on other handicaps for the small (and new) firms which have created most new jobs in the U.S.
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