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Income Addiction and Efficiency Wages

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Abstract

This analysis uses rational income addiction to explain efficiency wages. Absent addiction, the model yields an efficient pension scheme with mandatory retirement. With income addiction, firms may generate unemployment by providing above-market wages in tandem with pensions and mandatory retirment. The model predicts steeper wage profiles for high-skill workers or economies with low unemployment, flatter wage profiles for workers with a high rate of time preference, and that potential addicts will exhibit a high propensity to save but little savings early in the life-cycle.

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  • Robert W Drago, "undated". "Income Addiction and Efficiency Wages," Working papers _010, University of Wisconsin - Milwaukee.
    • Handle: RePEc:wop:wimihp:_010
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    File URL: ftp://ftp.csd.uwm.edu/pub/drago/addict.chi
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    More about this item

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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