Efficiency‐wage Unemployment and Economic Welfare in a Model of Endogenous Growth

This paper examines positive and normative implications of efficiency‐wage‐induced unemployment within a model of endogenous growth. Sector‐specific impacts of the wage rate on labour efficiency establish a correlation between the growth rate and the rate of unemployment. The sign of this correlation is determined by the intersectoral wage differential. Despite the existence of unemployment, decisive positive properties of the full‐employment model are preserved. However, welfare implications of the full‐employment model may be reversed. The optimal policy can be to reduce growth, while at the same time raising unemployment.