To reconstruct the micro-foundation of Keynesian macro-economics, the eﬃciency wage
theory has generally been considered a success in providing a plausible explanation for the existence of involuntary unemployment. However, little has been said about how monetary policy causes ﬂuctuations in aggregate employment and output in the eﬃciency wage theory. This paper extends Lin and Yang’s [Econ. Inq. 39 (2001) 644] shirking-type eﬃciency wage model with tournaments to account for money non-neutrality. A distinct feature of our model is that, due to the adoption of tournaments, there will be a hierarchical wage structure rather than a ﬂat wage in the economy. As will be argued, the labor market characterized in this paper is in a sense a reversion to Keynes’ General Theory, but also an improvement upon it.