Abstract
This paper explores the combined effects of efficiency wages and labor market matching frictions. A combined efficiency wage-frictional model is developed in which separate efficiency wage, frictional, and undistorted models are nested. It is found that the inclusion of efficiency wages puts upward pressure on wages and raises unemployment, while the friction puts downward pressure on wages and raises unemployment. Thus, it appears that unemployment generated by the frictional model cannot completely fulfill the role of unemployment as a discipline device, and vice versa. Other results show that the combined model has significantly different characteristics than its components.
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