Latest / Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates
How Central Banks Use the Shapiro-Stiglitz Efficiency Wage Model
Today, Lucas and Luna explore how central banks incorporate the Shapiro-Stiglitz efficiency wage model into their understanding of labor markets and inflation. The model suggests that firms pay above-market-clearing wages to reduce shirking, creating involuntary unemployment even in equilibrium. Lucas explains how this framework helps central banks interpret the non-accelerating inflation rate of unemployment (NAIRU) and why wage-setting behavior matters for policy. They discuss a 2025 Bank of England working paper that used efficiency wage theory to explain persistent post-pandemic labor…
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