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 tightness in the UK. The hosts also touch on how the model interacts with the Phillips curve and what it means for the current rate-setting environment in mid-2026. Concrete example: the UK's unusually low labor force participation rate among older workers and how efficiency wages might be keeping wages sticky. The episode closes with a reflection on how microfoundations shape macro policy decisions. #ShapiroStiglitz #EfficiencyWage #CentralBanks #LaborMarket #NAIRU #PhillipsCurve #MonetaryPolicy #BankOfEngland #InvoluntaryUnemployment #WageSetting #Inflation #LaborTightness #Macroeconomics #Economics #FexingoEconomics #FexingoBusiness #BusinessPodcast #Podcast Keep every episode free: buymeacoffee.com/fexingo