Wage,productivity and unemployment: microeconomics theory and macroeconomics data

We confront microeconomics theory with macroeconomics data. Unemployment results from two main micro-level decisions of workers and firms. Most of the efficiency wage and bargaining theories predict that over the business cycle, unemployment falls below its natural rate when the worker’s real wage exceeds the reservation wage. However, these theories have weak empirical support. Firm’s decision predicts that when the worker’s real wage exceeds the marginal product of labour (MPL), unemployment increases above its natural rate. Accounting for this microeconomic decision helps explain almost all the fluctuations of US unemployment.