Near rationality in wage setting
This study argues that it is interesting to examine near rational behaviour in the context of an efficiency wage model, where there are positive if decreasing returns to increasing the wage beyond the efficient level. Previous research has found it difficult to distinguish between efficiency wage and bargaining models, which have similar empirical predictions. But unions are a priori more likely to develop in environments in which the technology favours efficiency wage payments. This makes it interesting to investigate what it costs the firm to deviate from the efficiency wage. If it does not cost a lot, firms may give in to union demands. This study derives expressions for the wage deviation and for the associated profit loss. For illustrative purposes, these are calibrated for UK, US and Indian manufacturing, taking a plausible parameterization of the effort-wage function and using available estimates of the wage and employment elasticities of output. While there is evidence of positive effort returns to wages in the UK and India, the results are consistent with wage bargaining pushing the wage above the efficient level. The associated profit loss is considerably larger in the UK than in India. In contrast, US firms pay wages that are insignificantly different from the efficiency wage.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 38 (2006)
Issue (Month): 21 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAEC20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAEC20|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence F. Katz, 1986.
"Efficiency Wage Theories: A Partial Evaluation,"
in: NBER Macroeconomics Annual 1986, Volume 1, pages 235-290
National Bureau of Economic Research, Inc.
- 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.
- Stiglitz, Joseph E, 1974. "Alternative Theories of Wage Determination and Unemployment in LDC'S: The Labor Turnover Model," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 194-227, May.
- Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
- Harry J. Holzer, 1990.
"Wages, employer costs, and employee performance in the firm,"
Industrial and Labor Relations Review,
ILR Review, Cornell University, ILR School, vol. 43(3), pages 147-164, February.
- Harry J. Holzer, 1989. "Wages, Employer Costs, and Employee Performance in the Firm," NBER Working Papers 2830, National Bureau of Economic Research, Inc.
- Weiss, Andrew W, 1980. "Job Queues and Layoffs in Labor Markets with Flexible Wages," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 526-38, June.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005.
"Unemployment: Macroeconomic Performance and the Labour Market,"
Oxford University Press, number 9780199279173, March.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, March.
- John H. Cochrane, 1988.
"The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives,"
NBER Working Papers
2730, National Bureau of Economic Research, Inc.
- Cochrane, John H, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," American Economic Review, American Economic Association, vol. 79(3), pages 319-37, June.
- Bhalotra, Sonia R., 1998. "Changes in utilization and productivity in a deregulating economy," Journal of Development Economics, Elsevier, vol. 57(2), pages 391-420.
- Alan B. Krueger & Lawrence H. Summers, 1986. "Reflections on the Inter-Industry Wage Structure," NBER Working Papers 1968, National Bureau of Economic Research, Inc.
- Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
- George A. Akerlof & Andrew K. Rose & Janet L. Yellen, 1988. "Job Switching and Job Satisfaction in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 495-594.
- Levine, David I, 1992. "Can Wage Increases Pay for Themselves? Tests with a Production Function," Economic Journal, Royal Economic Society, vol. 102(414), pages 1102-15, September.
- Daniel M.G. Raff & Lawrence H. Summers, 1986.
"Did Henry Ford Pay Efficiency Wages?,"
NBER Working Papers
2101, National Bureau of Economic Research, Inc.
- Groshen, Erica L, 1991. "Sources of Intra-industry Wage Dispersion: How Much Do Employers Matter?," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 869-84, August.
When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:38:y:2006:i:21:p:2513-2521. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.