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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
    DOI: 10.1086/298110
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