Real Rigidities in the Labour Market 

New Keynesian  theories of the labour market help in explaining  the existence of involuntary unemployment. The theories also attempt to explain why changes in aggregate demand lead  to  larger changes in employment and relatively  smaller changes in the real wage in the labour market. One of the reasons postulated for the existence of unemployment in the labour market is that firms voluntarily pay higher real wages, as compared to  the market-clearing wage,  to the workers on their  rolls with  a view  to  increasing their  efficiency and1 or with  a  view  to providing them  the incentives not  to shirk work  in a situation where the effort level  of the workers cannot be perfectly monitored. The  imperfections caused thereby in the labour market lead to unemployment. We will qonsider efficiency wage model postulated in New Keynesian theories of unemployment in greater details.