2001), Unemployment and the Productivity Slowdown: A Labour Supply Perspective

Many OECD economies suffered a productivity slowdown beginning in the early 1970s. However, the increase in unemployment that followed this slowdown was more pronounced in European economies relative to the US. In this paper we present an efficiency wage model, which enables us to identify five channels through which the productivity slowdown can affect workers ’ effort incentives. We argue that this model can explain the different trends in unemployment across countries over this period in the face of a similar slowdown in productivity. We also demonstrate how the link between growth and unemployment depends upon labour market institu-tions in such a way that we can reconcile the mixed empirical results observed in the literature