The paper discusses the implication of money illusion on persistent unemployment. A particular form of money illusion is assumed and this is modeled into the efficiency wage theory while separating the analysis into nominal and real frames. The model shows that the level of unemployment in the nominal and the real frame are likely to be different and that the government has an incentive to provide a signaling mechanism to the workers to reduce unemployment levels. Additionally, the government is shown to have an incentive to announce unemployment rates.
Habu, Takuma Mr
"Money Illusion and its Implication on Unemployment,"
Undergraduate Economic Review:
1, Article 10.
Available at: http://digitalcommons.iwu.edu/uer/vol7/iss1/10