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Theories of Wage Rigidity

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Joseph E. Stiglitz

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Abstract

This paper considers two sets of theories attempting to explain wage rigidities and unemployment: implicit contract theory and the efficiency wage theory. The basic thesis of the paper is that the former set of theories do not provide a convincing explanation of the kind of wage rigidity which is associated with cyclical unemployment,while the latter theories do. Several of the more recent versions of implicit contract theory are considered: implicit contracts with asymmetric information may give rise to over employment rather than underemployment, and the forms of contracts to be expected, were asymmetric information considerations paramount, are not observed.Other versions of the asymmetric information implicit contract model, explicitly long term in nature, may give rise to full employment. One version of implicit contract theory which does give rise to lay-offs arises when search is costly and cannot be monitored. But even this extension does not explain certain important features of observed patterns of unemployment. In contrast, the efficiency wage models not only provide an explanation of the existence of unemployment equilibrium in competitive economies, but they also provide part of the explanation of the observed patterns of unemployment. They also explain why different firms may pay similar workers different wages, why wages may be sticky, why firms maynot loose much if they fail to adjust their wages, and why, when they adjust their wages optimally, they adjust them slowly.The policy implications of the efficiency wage model are markedly different from those of models in which wages are absolutely rigid aswell as from those in which unemployment arises from asymmetric information.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1442.

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Date of creation: Jun 1986
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Handle: RePEc:nbr:nberwo:1442

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  1. Bruce C. Greenwald & Joseph E. Stiglitz, 1990. "Toward a Theory of Rigidities," NBER Working Papers 2938, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Alan C. Stockman, 1986. "Price Contracts, Output, and Monetary Disturbances," NBER Working Papers 1960, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Michael Bruno, 1988. "Theoretical Developments in the Light of Macroeconomic Policy and Empirical Research," NBER Working Papers 2757, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Jonathan P. Thomas, 2000. "Fair pay and a Wagebill Argument for Wage Rigidity and Excessive Employment Variability," Labor and Demography 0004004, EconWPA. [Downloadable!]
    Other versions:
  5. Vassilis T Rapanos, 2004. "Tax Incidence In A Model With Efficiency Wages And Unemployment," Public Economics 0404001, EconWPA. [Downloadable!]
  6. Hau, Harald, 2000. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," CEPR Discussion Papers 2356, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Thomas J. Carter, 2005. "Monetary Policy, Efficiency Wages, and Nominal Wage Rigidities," Eastern Economic Journal, Eastern Economic Association, vol. 31(3), pages 349-359, Summer. [Downloadable!]
  8. George A. Akerlof & Lawrence F. Katz, 1986. "Do Deferred Wages Dominate Involuntary Unemployment as a Worker Discipline Device?," NBER Working Papers 2025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Victor Zarnowitz, 1989. "Cost and Price Movements in Business Cycle Theories and Experience: Hypotheses of Sticky Wages and Prices (SEE ALSO WP3132-send out together)," NBER Working Papers 3131, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Harry J. Holzer & Lawrence F. Katz & Alan B. Krueger, 1988. "Job Queues and Wages: New Evidence on the Minimum Wage and Inter-Industry Wage Structure," NBER Working Papers 2561, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Eliasson, Ann-Charlotte, 2001. "Is the Short-run Phillips Curve Nonlinear? Empirical Evidence for Australia, Sweden and the United States," Working Paper Series 124, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  12. William T. Dickens & Lawrence F. Katz, 1987. "Inter-Industry Wage Differences and Theories of Wage Determination," NBER Working Papers 2271, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Floro Ernesto Caroleo, 2004. "Fondamenti teorici della rigidità’ salariale nell’ambito dei “Non Market Clearing Models”," CELPE Discussion Papers 79, CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy. [Downloadable!]
  14. Juan Duque & Raúl Ramos & Jordi Suriñach, 2006. "Wages and productivity: the role of labour market institutions in OECD countries," Empirica, Springer, vol. 33(4), pages 231-243, September. [Downloadable!] (restricted)
  15. N. Gregory Mankiw, 1988. "Recent Developments in Macroeconomics: A Very Quick Refresher Course," NBER Working Papers 2474, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. David Marsden, 2004. "The Network Economy and Models of the Employment Contract: Psychological, Economic and Legal," CEP Discussion Papers dp0620, Centre for Economic Performance, LSE. [Downloadable!]
  17. Lawrence H. Summers, 1989. "Relative Wages, Efficiency Wages, and Keynesian Unemployment," NBER Working Papers 2590, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  18. Alan B. Krueger, 1988. "Are Public Sector Workers Paid More Than Their Alternative Wage? Evidence From Longitudinal Data and Job Queues," NBER Working Papers 2500, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  19. Joseph E. Stiglitz, 1988. "The Wage-Productivity Hypothesis: Its Economic Consequences and Policy Implications," NBER Working Papers 1976, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  20. N. Gregory Mankiw, 1991. "A Quick Refresher Course in Macroeconomics," NBER Working Papers 3256, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Joseph E. Stiglitz, 1986. "Economics of Information and the Theory of Economic Development," NBER Working Papers 1566, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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