Labor productivity in the efficiency-wage model: A consideration of the firm's death rate

It is inappropriate to equate the "representative firm" with the typical fi rm, particularly for economies which consist of small enterprises where a l arge number of jobs are created or disappear as establishments are born or die. If workers care about the job disappearance risk, their utility and ef fort offered will be influenced by the death rate of firms. This paper sets out an efficiency-wage model and takes the probability of the firm's closu re into account. By extension, it is shown that equilibrium labor productiv ity is plausibly procyclical under certain circumstances, which is consiste nt with the stylized facts observed in many countries.