EFFICIENCY WAGES, PARTIAL WAGE RIGIDITY, AND MONEY NONNEUTRALITY

The efficiency wage theory is generally regarded as a plausible explan ation as to why wages do not fall to clear labor markets in the presen ce of involuntary unemployment. At the current stage of its developmen t, not much is said concerning the role of nominal money and the fluct uations in aggregate employment and output. Adopting the efficiency wa ge theory, this paper uses the idea of partial rigidity of wages in an attempt to explain why changes in money supply and other demand manag ement policies can cause fluctuations in aggregate employment and outp ut.