Efficiency wages, staggered wages, and union wage-setting

This article studies the role of staggered efficiency wages in a small-scale DSGE model. The simple structure of the model allows for closed-form solutions. The set-up differs from the related literature in that I assume wages are sticky and unions are responsible for wage-setting. The model has the potential to explain why wages depend strongly on past wage levels as it is suggested by empirical data. The presence of efficiency wages increases persistence, however, only for certain parameter constellations. In particular, the elasticity of effort with respect to the wage has to be large. In an extension of the model I show that this is more likely to be the case if wages are the outcome of a bargaining process between unions and firms.