Countercyclical Endogenous Uncertainty Shocks, Efficiency Wages and Procyclical Precautionary Labor Productivity

Abstract

This work introduces a new mechanism generating procyclical comovements of labor productivity, employment, through endogenous variations of workers' effort, in a simple model with efficiency wages, near a locally indeterminate steady state. A current endogenous countercyclical uncertainty shock makes risk averse workers more willing to provide imperfectly monitored "precautionary effort" by increasing their expected utility gain of not shirking. If workers' relative prudence is small and decreasing fast near the steady state, frms' efficiency wage contracts generate significant endogenous procyclical variations of effort, employment and labor productivity, in particular when the capital-efficient labor elasticity of substitution is smaller than and close to 1.