Turnover costs, efficiency wages and cycles

Abstract

This paper studies the implications of our recent work on two labor market imperfections for the cyclical properties of wages and employment. One of these imperfections is turnover costs. We explore the implications of the interaction of turnover costs with investment decisions for the form of wage contracts and hence for the cyclical properties of wages. The other imperfection is the difficulty of verifying employee performance. We consider the implications of this for the payment of efficiency wages and the consequence for the cyclical properties of wages and emloyment