efficiency wage models of unemployment one view h lorne carmichael persistent wage rigidity and involuntary unemployment appear to be recurrent problems in most economies what could be preventing the wage adjustment necessary to clear the labor market many recent papers claim to have found the answer in efficiency wage models this paper surveys this literature and attempts to evaluate its accomplishments it concludes that the efficiency wage models fail to explain wage rigidity or persistent involuntary unemployment persistent involuntary unemployment of workers is a recurrent problem in labor markets all over the world unemployed workers seem unable to find work even though they are willing to accept lower wages than those being paid employed workers with similar skills what could be preventing wages from adjusting to clear these markets many recent papers known collectively as the efficiency wage literature now claim to have the answer this paper will survey the efficiency wage literature and critically evaluate some of its accomplishments efficiency wage models have already been examined by yellen 1984 katz 1986 and stiglitz 1987 and have received generally favorable reviews this paper is more critical its overall conclusion is that efficiency wage models provide some useful insights into the workings of the labor market but they do not provide a satisfactory account of wage rigidity or involuntary unemployment there are at least five separate versions of the efficiency wage model they share a common structure however and this is outlined in the first section of the paper this section also attempts to relate efficiency wage models to other recent models of unemployment section ii examines and criticizes the different approaches in detail section iii evaluates the achievements of this approach and suggests some directions for future work i a general efficiency wage model efficiency wage models as the name suggests are first of all models of wages they generate unemployment by showing that firms will sometimes want to set wages at non market clearing levels it is useful to begin therefore by reviewing how wages and employment are determined in some related models in a perfectly competitive labor market the wage for each type of labor is adjusted constantly to maintain equality of supply and demand overall employment fluctuates in response to demand changes as workers move up and down their labor supply curves unemployment is voluntary in that anyone who is not working prefers that state to employment at the going wage for people of his skills as well the value of a worker s marginal product is equal to the marginal value of his leisure so there are no unexploited wage bargains between unemployed workers and firms this model is successful in predicting the long term response of wages to shifts in demand and supply but it is clear that in the short run its depiction of voluntary unemployment and flexible wages is unrealistic a natural way to generate more realism is to assume that wages are inflexible in the short run in this case a reduction in demand away from a long run equilibrium will lead to rationing of jobs by employers as they attempt to stay on their labor demand curves the unemployment here is involuntary in that the unemployed would prefer to be working at the going wage and is inefficient in that there are lost gains from trade between these workers and firms the weakness of this model is that it is silent about the mechanism that keeps wages rigid unemployed workers who offer to work for less than the fixed wage ought to find work the early implicit contract models of azariadis 1975 baily 1974 and gordon 1974 provide one explanation for wage rigidity these models introduced the idea that wages can do more than just clear the market for labor wages in an implicit contract model are used to shift the risk generated by uncertain output market conditions from risk averse workers to the risk neutral firm

the dispersion of employees wage increases and firm performance previous studies examining intra firm wage dispersion and firm performance have focused on wage levels the authors of this study argue that for purposes of comparing wage dispersion s positive inc

testing for substitutability in the mackerel market a new method using fractional cointegration abstractthis article seeks to extend knowledge of the mackerel scomber scombrus market in the basque country a region in spain by analysing possible relationships between this and other species with similar characteristics such as the sardine sardina pilchardus the horse mackerel trachurus trachurus and the atlantic chub mackerel scomber colias all of them landed at the ports of the basque country specifically the goal is to learn whether these other species can be considered as mackerel substitutes to that end a fractional cointegration analysis of different series of historical prices is performed using a novel method never before used in studies of this type the results indicate that mackerel have no substitutes and thus form a mono species regional market this implies among other things that their price is not influenced by the prices of other species and this should be taken into account by managers when designing management measures and policies to improve the sustainability of

gift giving and worker productivity evidence from a firm level experiment abstract we present results from a field experiment designed to measure worker response to a monetary gift from their employer the experiment took place inside a tree planting firm paying its workforce incentive contracts firm managers told a crew of tree planters they would receive a pay raise for one day as a result of a surplus not attributable to past planting productivity we compare planter productivity the number of trees planted per day on the day the gift was handed out with productivity on previous and subsequent days of planting on the same block and thus under similar planting conditions we find direct evidence that the gift had a significant and positive effect on daily planter productivity controlling for planter fixed effects weather conditions and other random daily shocks

searching for price parity in the european whitefish market the purpose of this paper is to test for price parity across different species of whitefish in the european union price parity is defined by a system of cointegrated prices and would be evidence of a single european market for whitefish whitefish are of interest because eu fishers receive the largest share of their income from these fish species notwithstanding the single market policy of the eu by establishing national and regional associations to stabilize or increase the local price of fish fishers operate as if the european market is made up of separate submarkets with price being determined largely within each submarket if whitefish markets were price cointegrated such associations would be largely ineffective in that case what are required are regulations that encompass the european market

terms of trade tariffs and labor market adjustment in developing countries a three goods model importables exportables and nontradables is used to analyze labor market adjustment to changes in the terms of trade and import tariffs for a small open economy first a three goods four factor model labor and capital specific to each sector is developed and used to investigate how an exogenously generated change in a country s terms of trade affects labor allocation and wages in the short run next a more traditional three goods two factor model is used to examine the effects in the long run the analysis is carried out under alternative assumptions regarding wage flexibility full flexibility economy wide real wage rigidity and sector specific real wage rigidity

labor turnover and the natural rate of unemployment efficiency wage vs frictional unemployment wage and unemployment responses to changes in economic environment are compared for efficiency wage and frictional models changes in aggregate demand persistence of job specific shocks cost of living and unemployment benefits are considered wages and unemployment move in the same direction in the two models except that an upward shift in aggregate labor demand can reduce the real wage in the efficiency wage but not the frictional model in a numerical simulation calibrated to u s data real productivity shocks in the efficiency wage model yield a ratio of unemployment to wage variability close to that of the united states

the changing responsiveness of wages to price level shocks explicit and implicit indexation the article provides evidence for the u s over the period 1961 84 that the responsiveness of nonunion wages to price level shocks changes through time much as the degree of indexation in union contracts does suggesting that there exists implicit as well as explicit indexation when coupled with the result from previous research that indexation responds positively to inflation uncertainty the findings indicate that greater inflation uncertainty may lead to reduced overall wage rigidity in the context of a rational expectations model with long term wage contracts a decline in the effectiveness of an activist monetary policy could result

allocation under dictatorship research in stalin s archives we survey recent research on the soviet economy in the state party and military archives of the stalin era the archives have provided rich new evidence on the economic arrangements of a command system under a powerful dictator including stalin s role in the making of the economic system and economic policy stalin s accumulation objectives and the constraints that limited his power to achieve them the limits to administrative allocation the information flows and incentives that governed the behavior of economic managers the scope and significance of corruption and market oriented behavior and the prospects for economic reform

did henry ford pay efficiency wages we examine henry ford s introduction of the five dollar day in 1914 in an effort to evaluate the relevance of efficiency wage theories of wage and employment determination we conclude that the ford experience strongly supports the relevance of these theories ford s decision to increase wages dramatically is most plausibly the consequence of labor problems of the kind efficiency wage theorists stress the structure of the five dollar day program is consistent with the predictions of efficiency wage theories there is vivid evidence that the introduction of the five dollar day resulted in substantial queues for ford jobs significant increases in ford productivity and profits accompanied the new regime

earnings determination and labour markets gran santiago chile 1978 abstract the purpose of this study is twofold first to ascertain whether or not there are statistical differences in the structure of earnings functions among workers in various sectors of economic activity second to provide a test of the human capital approach in the explanation of earning differentials among wage earners using individual characteristics of full time wage earners in santiago the results show that the structures of earnings functions are not statistically different across sectors of economic activity also the application of a human capital model shows that about 50 percent of the relative dispersion of earnings may be attributed to differences in schooling and experience

might makes rights a theory of the formation and initial distribution of property rights this paper is a theoretical and empirical investigation into the formation and initial distribution of property rights violence is singled out as a major constraint on this formation process its role is explicitly modeled in a choice theoretic framework and some of the implications are tested using data collected from contracts written during the california gold rush of 1848

long run price flexibilities for high valued uk fish species a cointegration systems approach in this paper the own and cross price flexibilities for four high valued species bass lobster sole and turbot landed in the uk are estimated system of equation models were developed using the vector error correction model vecm approach johansen s multivariate approach was used to obtain estimates of the long run steady state relationship vectors between fish prices and landings to find unique vectors i e no interdependent vectors zero restrictions on the coefficients of the price variables were applied so that the model effectively contained quantity independent variables only the resulting vectors were four unique cointegration long run relationships of monthly fish prices and landings various tests suggested that the variables were i 1 nonstationary variables the model also suggested that there are more than one cointegration vectors relationships between the variables it was found that bass has the largest absolute long run own price flexibility bass and lobster were found to be

a theory of dual labor markets with application to industrial policy discrimination and keynesian unemployment this paper develops a model of dual labor markets based on employers need to motivate workers in order to elicit effort from their workers employers may find it optimal to pay more than the going wage this changes fundamentally the character of labor markets the model is applied to a wide range of labor market phenomena it provides a coherent framework for understanding the claims of industrial policy advocates it also can provide the basis for a theory of occupational segregation and discrimination that will not be eroded by market forces finally the model provides the basis for a theory of involuntary unemployment

product aggregation market integration and relationships between prices an application to world salmon markets relationships between prices of goods offer motives of interest in at least two areas market integration and product aggregation there is a close relationship between market integration and aggregation which may increase the usefulness of market integration studies in this article these relationships are developed and illustrated by an application to the world salmon market it is shown that the law of one price holds for an international market with five salmon species this result has significant implications for the world salmon market regarding both product aggregation in demand analyses and international trade policy

efficiency wages and currency devaluation abstract this paper applies the efficiency wage theory which is a powerful instrument to shed light on why involuntary unemployment is persistent in the labor market to evaluate the effect of currency devaluation in an open economy it is found that a currency devaluation will definitely depress the domestic output in the presence of the efficiency wage consideration this framework can be viewed as a theoretical structure in explaining the empirical findings of contractionary devaluation

relative wages efficiency wages and keynesian unemployment while modern economic theorists have produced a variety of explanations for the failure of wages to fall in the face of unemployment keynes emphasis on relative wages has not been reflected in most contemporary discussions this short paper suggests that relative wage theories in which workers productivity depends primarily on their relative wage provide the best available apparatus for understanding actual unemployment and its fluctuations such theories are very closely related to the efficiency wage theories that have received widespread attention in recent years this abstract was borrowed from another version of this item

sectoral wage rigidity in the canadian and french economies abstract this paper estimates the degree of wage flexibility in seven french major sectors and 16 canadian manufacturing industries in order to test the predictions of efficiency wage theory and to compare the degree of wage flexibility with the u s we estimate industry wage flexibility with disaggregated phillips curves and find that efficiency wage theory explains the inter industry pattern of wage flexibility in france and canada quite well using previous estimates from the u s we find that wages are usually more flexible in french and canadian industries than in the corresponding u s industry and that the industries with the most flexible wages in france and canada tend to have the most flexible wages in the u s

wage rigidity micro and macro evidence on labor market adjustment in the modern sector aggregate data on wages and employment may provide misleading indicators of labor market conditions they may suggest inappropriate wage policies in the face of rising unemployment experienced in many developing countries during the 1980s such increases in unemployment are often attributed to wage rigidities a cursory review of aggregate data for the modern sector in cote d ivoire would support this view suggesting that employment declined during the 1979 84 recession due to an increase in real wages examination of disaggregated data from two labor force censuses of the modern sector however shows that real wages declined for specified classes of labor the work force was characterized by greater education training and experience workers with a given level of attributes received a lower real wage by the end of the recession than before it despite this drop in real wages employment in the modern sector declined

efficiency wage models of unemployment keynesian economists hold it to be self evident that business cycles are characterized by involuntary unemployment but construction of a model of the cycle with involuntary unemployment faces the obvious difficulty of explaining why the labor market does not clear involuntarily unemployed people by definition want to work at less than the going wage rate why don t firms cut wages thereby increasing profits

the contractual nature of the firm for their helpful comments i am grateful to armen a alchian yoram barzel keith leffler john s mcgee and dean worcester 1 ronald h coase the nature of the firm 4 economica 386 1937 the paper however was written several years earlier see note 3 infra 2 the social sciences citation index provides the following information breaking down the period of 1966 80 into three five year periods the total citations of coase s firm paper for each subperiod are 1966 70 17 citations 1971 75 47 citations and 1976 80 105 citations

a theory of price control price or rent control is but one of many forms of legislative action which interfere with private contracting in the market place to delimit the scope of my analysis i shall use the term price control to refer only to any set of regulations which satisfies the following three conditions first the control must fix the price or income terms of private contracts this categorically excludes any laws which regulate the distribution of income among the contracting parties on a share or percentage basis 2 second the control must involve no appropriation of proceeds to or from the government taxation and subsidization are thus excluded finally the fixing of price must not be associated with direct government sales purchases or manipulation of resources so as to maintain the regulated price 3 by this stipulation price support is also excluded even on such terms legal regulations to control price are still many and varied to evaluate our understanding of the class of phenomena which we seek to explain it is essential that we discover implications refutable by facts by this criterion the available body of economic theory pertaining to price control is deficient indeed the massive literature on the subject offers few such implications 4 an alternative approach to analyzing the observable effects of price control is presented here

common elements of efficiency wage theories what relevance for developing countries conventional labour economics argues that wages are determined by supply and demand and that the typical firm is a wage taker efficiency wage theories state that wages are endogenous to a firm s own optimising behaviour and that the wage rate determines the labour productivity these theories raise questions regarding the effectiveness of expenditure reducing and expenditure switching adjustment policies this article reviews the theoretical and empirical literature on efficiency wages it examines alternative models highlights the emphasis of empirical research towards industrial countries and points out the need for a test based on the major implications of the theory

a model of the natural rate of unemployment since the publication of edmund phelps volume the new macroeconomics has treated the labor market as a dynamic process of rational search by unemployed workers for available vacancies wages are viewed as at least potentially flexible though free contracting between workers and firms may lead to fixed wages in the short run imperfect information is a crucial element of the theory for it implies both a need for contracting and a need for rational search rather than simple market clearing in each period a positive rate of frictional unemployment may exist in equilibrium denoted as the natural rate this unemployment is due to the frictions in the search process and imperfections in information rather than to any deficiency in aggregate demand milton friedman defined the natural rate as the level that would be ground out by the walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of the labor and commodity markets including market imperfections stochastic variability in demands and supplies the cost of gathering information about job vacancies and labor availabilities the costs of mobility and so on p 8 this paper reexamines the micro foundations of the natural rate in a model of labor market equilibrium in which turnover flows and imperfect information are explicitly considered workers may quit their current jobs to enter the unemployment pool in order to search among available vacancies for a more preferred position firms economize on turnover by an appropriate wage policy

efficiency wages wage indexation and macroeconomic stabilization abstract this paper examines the effects of nominal wage indexation on output variability when effort affects the productivity of labor inputs given this specification it is shown that contrary to gray s 1976 result full wage indexation is not destabilizing in the presence of supply shocks