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Efficiency wages revisited: The internal reference perspective

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  • Danthine, Jean-Pierre
  • Kurmann, Andre

Abstract

The missing wage rigidity in general equilibrium models of efficiency wages is an artifact of the external wage reference perspective conventionally adopted by the literature. Efficiency wage models based on an internal wage reference perspective are capable of generating strong wage rigidity. We propose a structural model of efficiency wages that is broadly consistent with the reported evidence on fairness in labour relations and rent-sharing. Our model provides a robust explanation for wage rigidity and procyclical effort. It also rationalizes reciprocal behaviour by workers and the observation that firm productivity is a significant predictor of wage setting.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 90 (2006)
Issue (Month): 2 (February)
Pages: 278-284

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Handle: RePEc:eee:ecolet:v:90:y:2006:i:2:p:278-284

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  1. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  2. Danthine, Jean-Pierre & Kurmann, Andre, 2002. "Fair Wages in a New Keynesian Model of the Business Cycle," CEPR Discussion Papers 3423, C.E.P.R. Discussion Papers.
  3. Fabrice Collard & David de la Croix, 2000. "Gift Exchange and the Business Cycle: The Fair Wage Strikes Back," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 166-193, January.
  4. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  5. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
  6. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
  7. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-25, March.
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Cited by:
  1. Holden, Steinar & Wulfsberg, Fredrik, 2007. "Are real wages rigid downwards?," Memorandum 07/2007, Oslo University, Department of Economics.
  2. Erkki Koskela & Ronnie Schöb, 2009. "A note on internal and external reference in efficiency wage models," Journal of Economics, Springer, vol. 96(1), pages 79-86, January.
  3. Paulo Bastos & Natália P. Monteiro & Odd Rune Straume, 2008. "Firm heterogeneity and wages in unionised labour markets: Theory and evidence," NIPE Working Papers 14/2008, NIPE - Universidade do Minho.
  4. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.
  5. Hartmut Egger & Udo Kreickemeier, 2009. "Firm Heterogeneity And The Labor Market Effects Of Trade Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 187-216, 02.
  6. Strifler, Matthias & Beissinger, Thomas, 2012. "Fairness Considerations in Labor Union Wage Setting: A Theoretical Analysis," IZA Discussion Papers 6799, Institute for the Study of Labor (IZA).
  7. Mondal, Debasis & Gupta, Manash Ranjan, 2008. "Intellectual property rights protection and unemployment in a North South model: A theoretical analysis," Economic Modelling, Elsevier, vol. 25(3), pages 463-484, May.

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