Efficiency Wages

Efficiency Wages: Models of Unemployment, Layoffs, and Wage Dispersion

Andrew Weiss
Copyright Date: 1990
Pages: 126
https://www.jstor.org/stable/j.ctt7zv0qf
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  • Book Info
    Efficiency Wages
    Book Description:

    Known for his seminal work in efficiency-wage theory, Andrew Weiss surveys recent research in the field and presents new results. He shows how wage schedules affect the kinds of workers a firm employs and how well those workers perform on the job. Using straightforward examples, he demonstrates how efficiency-wage theory can explain labor market outcomes and guide government policy. There is a separate section of applications to less developed countries. "Efficiency-wage models represent one of the most important developments in economic theory of recent years. They have, at last, provided integrated explanations both of macroeconomic phenomena, such as unemployment and wage rigidity, and microeconomic phenomena, such as wage dispersion. Weiss--one of the pioneers of efficiency-wage theory--provides here a masterful survey, a lucid and systematic and yet critical account of this rapidly developing branch of economics. This book should be required reading in all courses in macroeconomics."--Joseph Stiglitz, Stanford University "Efficiency Wages should be on the bookshelf of all labor and macroeconomists."--Lawrence H. Summers, Harvard University "A splendid monograph .. most readable.. I will put it on my reading list."--Partha Dasgupta, Stanford University

    Originally published in 1991.

    ThePrinceton Legacy Libraryuses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These paperback editions preserve the original texts of these important books while presenting them in durable paperback editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

    eISBN: 978-1-4008-6206-1
    Subjects: Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-vii)
  4. 1. INTRODUCTION AND OVERVIEW
    (pp. 1-14)

    In discussing models of long-term unemployment we are motivated by the question “If a firm faces an excess supply of labor why doesn’t it cut its wages?” This is a somewhat different question than the usual macro-economic question concerning insufficient aggregate demand. Here we are simply asking, regardless of the level of aggregate demand, why don’t markets clear at the micro-economic level? Firms are presumably maximizing their profits. In the conventional micro-economic analysis whatever the level of aggregate demand firms would offer the lowest wage that would satisfy their labor demand. Consequently, as Modigliani pointed out, downward wage rigidity is...

  5. PART I. WORKER HETEROGENEITY AS A CAUSE OF UNEMPLOYMENT AND LAYOFFS
    • 2. SINGLE WAGE EQUILIBRIUM
      (pp. 15-27)

      Adverse selection models of the labor market explain the failure of firms to cut wages in the face of an excess supply of labor by discussing how the composition of a firm’s labor force would change in response to changes in the wage contract the firms offer. In these models, there is a heterogeneous labor force, and it is generally assumed that the reservation wages of workers are positively correlated with their labor endowments. Reservation wages are derived from the value the worker places on the activities he would pursue when unemployed. The possible activities include work in a non-industrial...

    • 3. UNEMPLOYMENT WITH MULTIPLE WAGES
      (pp. 27-42)

      In Section 2 we analyzed single wage equilibria for a labor market in which there were heterogeneous workers, but all workers were observationally indistinguishable. In that section we assumed firms could not test workers and that it was costless for workers to change jobs. In this section we shall characterize multiple wage equilibria both for the labor market described in Section 2, and for labor markets with observable differences among workers and real costs of changing jobs.

      Figure 4 presents a Q(w)/w function which can generate a two wage equilibrium with job queues at the high wage, for the model...

    • 4. LAYOFFS AND FIRING OF WORKERS: AN ADVERSE SELECTION EXPLANATION
      (pp. 42-54)

      Thus far, we have focused on how unobserved worker heterogeneity can explain persistent job queues—involuntarily long term unemployment—and can cause a misallocation of workers between the industrial sector and the non-industrial sector or unemployment. In this section we shall show how unobserved worker heterogeneity can also explain why firms fire workers.

      If all workers were identical, or if all firms were perfectly informed about the productivity of workers, and both firms and workers were risk neutral, a firm would respond to a fall in the value of a worker’s output by cutting the worker’s wage. If the value...

  6. PART II. INCENTIVE MODELS
    • 5. AN OVERVIEW OF INCENTIVE EFFECTS OF WAGES
      (pp. 55-59)

      In Part II we shall continue our investigation of models in which in equilibrium firms pay wages that are higher than the market-clearing wage, so that the market equilibrium is characterized by job queues. In the incentive models of unemployment, if a firm facing an excess supply of labor were to cut its wages, the response of its workers would be so adverse as to outweigh the direct gains to the firm from the lower cost per worker.

      To focus on the incentive effects of wages we shall initially assume firms hire from a homogeneous pool of workers, thus abstracting...

    • 6. THE EFFECT OF WAGES ON TURNOVER
      (pp. 59-69)

      In order to show that the quit deterring effect of high wages can generate unemployment, it is necessary to first construct a model in which there are some quits to be deterred. The model we present is an extension of work by Steven Salop and Joseph Stiglitz.

      To focus on the incentive effects of wages we shall assume all workers are identical, and that tastes do not change over time. We also simplify the analysis by only allowing a firm to offer a set of wages rather than wages schedules in which wages rise with seniority as in the Salop...

    • 7. EFFORT INDUCING EFFECTS OF WAGES
      (pp. 69-86)

      Effort models are similar to the quit models expounded in Section 6. In both the quit and effort models wages and unemployment rates affect the behavior of workers in ways that matter to the firm. High wages and high unemployment rates reduce quits and increase effort. Similarly, in both models, if workers could be made to put up sufficiently large bonds, there would be no need to use wages to affect behavior. Since these bonds would eliminate quits and shirking at the Walrasian wage these models would not generate involuntary unemployment.

      The most influential wage incentive models, such as Lazear...

    • 8. THE NUTRITION MODEL
      (pp. 86-97)

      In this section we shall consider the most straightforward case in which wages affect behavior: the nutrition models. In these models the productivity of workers is directly affected by their incomes. Better fed workers have more energy and are less likely to become ill. When firms choose levels of compensation to pay workers they take into account the direct effect of compensation on worker productivity. Since these models are concerned with the direct effect of wages on labor endowments they have been presented in the context of labor markets in less developed countries—labor markets for which differences in income...

    • 9. CONCLUDING REMARKS
      (pp. 97-103)

      In this monograph we focused on the sorting, incentive and nutritional effects of wage contracts to explain why firms may choose not to lower their wages when faced with an excess supply of labor. We paid less attention to some of the other explanations that have received recent attention in the literature.

      George Akerlof has stressed the gift-exchange nature of employment relationships. He argues that when firms pay “high” wages they are in effect making a gift to the workers, which is reciprocated by the workers. They act in ways that benefit the firm even if they are not rewarded...

  7. References
    (pp. 104-116)
  8. INDEX
    (pp. 117-118)