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The Social Efficiency of Fixed Wages

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  • William R. Johnson

Abstract

This paper analyzes a model in which fixed wages and layoffs may be the most efficient way to organize employment contracts. When wages fluctuate to reallocate labor among firms, workers must make costly decisions and may undertake excessive search. In contrast, if all firms reallocate labor with layoffs and new hires at fixed wages, only those workers laid off will have decisions to make. The lower decision costs of the fixed wage contract may more than compensate for the resource cost of the unemployment it causes. A novel feature of the model is the result that the socially optimal contract, when chosen by all firms, may not be the privately optimal contract.

Suggested Citation

  • William R. Johnson, 1985. "The Social Efficiency of Fixed Wages," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(1), pages 101-118.
    • Handle: RePEc:oup:qjecon:v:100:y:1985:i:1:p:101-118.
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    File URL: http://hdl.handle.net/10.2307/1885737
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    Cited by:

    1. Macera, Rosario, 2018. "Intertemporal incentives under loss aversion," Journal of Economic Theory, Elsevier, vol. 178(C), pages 551-594.

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