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A Model of Involuntary Unemployment and Wage Rigidity: Worker Incentives and the Threat of Dismissal

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  • Sparks, Roger

Abstract

This paper analyzes a model that highlights imperfect monitoring and the threat of dismissal as microeconomic underpinnings for the efficiency-wage hypothesis. The author's major innovation is to allow the rules for dismissal, as well as the wage, to be determined endogenously as the equilibrium of a Stackelberg game played between firms and workers. The key results are as follows: a nontrivial equilibrium (where positive output is produced) must involve involuntary unemployment in that employed workers are strictly better off than are the unemployed; in addition, the equilibrium wage is rigid with respect to exogenous shifts in productivity. Copyright 1986 by University of Chicago Press.

Suggested Citation

  • Sparks, Roger, 1986. "A Model of Involuntary Unemployment and Wage Rigidity: Worker Incentives and the Threat of Dismissal," Journal of Labor Economics, University of Chicago Press, vol. 4(4), pages 560-581, October.
  • Handle: RePEc:ucp:jlabec:v:4:y:1986:i:4:p:560-81
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    Cited by:

    1. Groshen, Erica L. & Schweitzer, Mark E., 1998. "Inflation and unemployment revisited: Grease vs. sand," CFS Working Paper Series 1999/06, Center for Financial Studies (CFS).
    2. Fernandez, Jose & Nahata, Babu, 2009. "Pay What You Like," MPRA Paper 16265, University Library of Munich, Germany.
    3. Thomas Groll & Christopher J. Ellis, 2017. "Repeated Lobbying By Commercial Lobbyists And Special Interests," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1868-1897, October.
    4. Marcel Fafchampsm & Måns Söderbom, 2006. "Wages and Labor Management in African Manufacturing," Journal of Human Resources, University of Wisconsin Press, vol. 41(2).
    5. Francis Teal & Måns Söderbom, 2002. "Does firm size really affect earnings?," Economics Series Working Papers WPS/2002-08, University of Oxford, Department of Economics.
    6. Soderbom, Mans & Teal, Francis, 2004. "Size and efficiency in African manufacturing firms: evidence from firm-level panel data," Journal of Development Economics, Elsevier, vol. 73(1), pages 369-394, February.
    7. Illoong Kwon, 2005. "Threat of Dismissal: Incentive or Sorting?," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 797-838, October.
    8. Pau Olivella, 1995. "Information Structures and the Delegation of Monitoring," Annals of Economics and Statistics, GENES, issue 39, pages 1-32.
    9. Måns Söderbom & Francis Teal & Anthony Wambugu, 2002. "Does firm size really affect earnings?," CSAE Working Paper Series 2002-08, Centre for the Study of African Economies, University of Oxford.
    10. Marcel Fafchamps & Mans Söderbom & Najy Benhassine, 2009. "Wage Gaps and Job Sorting in African Manufacturing," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(5), pages 824-868, November.
    11. Eva Pichler, 1997. "How to beat the average," Quality & Quantity: International Journal of Methodology, Springer, vol. 31(3), pages 217-231, August.
    12. Altenburg, Lutz & Straub, Martin, 2001. "Taxes on labour and unemployment in a shirking model with union bargaining," Labour Economics, Elsevier, vol. 8(6), pages 721-744, December.
    13. repec:spr:izalpo:v:6:y:2017:i:1:d:10.1186_s40173-017-0092-2 is not listed on IDEAS
    14. Erica L. Groshen & Mark E. Schweitzer, 1999. "Firms' wage adjustments: a break from the past," Review, Federal Reserve Bank of St. Louis, issue May, pages 93-111.
    15. Izumi Yokoyama & Takuya Obara, 2017. "Optimal combination of wage cuts and layoffs—the unexpected side effect of a performance-based payment system," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-15, December.
    16. Thomas Groll & Christopher J. Ellis, 2013. "Dynamic Commercial Lobbying," CESifo Working Paper Series 4114, CESifo Group Munich.
    17. Campbell III, Carl M., 2006. "A model of the determinants of effort," Economic Modelling, Elsevier, vol. 23(2), pages 215-237, March.
    18. Francis Teal & Måns Söderbom, 2002. "Size and Efficiency in African Manufacturing Firms: Evidence from Firm-Level Panel Data," Economics Series Working Papers WPS/2002-07, University of Oxford, Department of Economics.

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