Intuition: the elasticity of efficiency w.r.t. the wage should equal 1. A firm can raise output either by hiring more workers or by paying a higher wage. At the margin, both strategies should have the same effect on output. Implications of model 1. Equilibrium may be characterized by involuntary unemploy¬ment, since each firm may have an incentive to pay a wage above its market-clearing level 2. The unemployment rate depends only on parameters from effort function. The production function is irrelevant to determining the equilibrium unemployment rate 3. The firm may have the incentive to keep wages fixed, even when the unemployment rate rises.