Book contents
- Frontmatter
- Contents
- Acknowledgements
- Introduction
- 1 Price rigidities and temporary equilibrium
- 2 Wage rigidity and short-run macroeconomic equilibrium
- 3 Real wages and the inflation—unemployment dilemma
- 4 External constraint, oil shock and economic policy
- 5 Implicit contracts and unions
- 6 Introduction to efficiency wage models
- 7 Efficiency wages, employment fluctuations and fiscal policy
- 8 Labour market dualism, efficiency wages and optimal taxation
- Notes
- References
- Author index
- Subject index
6 - Introduction to efficiency wage models
Published online by Cambridge University Press: 28 October 2009
- Frontmatter
- Contents
- Acknowledgements
- Introduction
- 1 Price rigidities and temporary equilibrium
- 2 Wage rigidity and short-run macroeconomic equilibrium
- 3 Real wages and the inflation—unemployment dilemma
- 4 External constraint, oil shock and economic policy
- 5 Implicit contracts and unions
- 6 Introduction to efficiency wage models
- 7 Efficiency wages, employment fluctuations and fiscal policy
- 8 Labour market dualism, efficiency wages and optimal taxation
- Notes
- References
- Author index
- Subject index
Summary
What is it that makes a profit-maximizing firm refuse to reduce wages while the jobless are willing to work for less? Answering this question is vital to understanding why long-term involuntary unemployment may exist in a competitive economy. The efficiency wage models, holding that the quality of labour depends on the wage received, are helpful in this matter. Indeed, the efficiency wage theory argue that real wages do not decrease because any drop in wages causes a drop in the quality of labour, owing to the hiring of less competent individuals, or to the reduced willingness of these individuals to provide effort. Thus, a decrease in wages is unprofitable when the drop in quality is greater than the drop in costs. Accordingly, the optimal wage (minimizing the cost of one unit of ‘efficient labour’) may be larger than the equilibrium wage in the labour market: then involuntary unemployment appears, but the firms are not willing to reduce wages.
Initially, the relationship between quality of labour and wages has been developed in analyses on developing countries which emphasized the link between nutrition and productivity (Leibenstein, 1963). In the less developed economies, wages directly affect individuals' health, physical welfare and therefore their productivity.
- Type
- Chapter
- Information
- Wages and UnemploymentA Study in Non-Walrasian Macroeconomics, pp. 176 - 198Publisher: Cambridge University PressPrint publication year: 1993