Unemployment and growth in the long run: An efficiency-wage model with optimal savings

An efficiency-wage model of steady-state equilibrium with labor-augmenting technical progress is developed to explore the long-run relationship between unemployment and growth. The rate of productivity growth is either specified exogenously or determined endogenously. In both cases, we preserve key results of the Shapiro-Stiglitz efficiency-wage analysis without growth. Our model, however, also yields some striking new results. For instance, an exogenous increase in the growth rate may raise the rate of efficiency-wage unemployment, and a once-for-all rise in the labor force may reduce the unemployment rate in the endogenous-growth case.