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Wages Ahead of Demand

  • J. Michael Orszag
  • Gylfi Zoega

This paper is an attempt to account for the empirical results of Krueger and Summers (1988) which suggest significant inter-industry wage differentials. We derive a dynamic efficiency wage model where firms use their wage policy to reduce turnover costs. Industry wages are shown to be a positive function of both the level of productivity and its expected rate of growth. We use estimated Solow residuals as measures of industry productivity growth and relate them to inter-industry wage differentials. A positive relationship is found at the one-digit level but not for two-digit manufacturing industries.

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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Archive Discussion Papers with number 9616.

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Date of creation: 1996
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Handle: RePEc:bbk:bbkewp:9616
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  1. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  2. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-25, March.
  3. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  4. Basu, Susanto & Fernald, John G., 1995. "Are apparent productive spillovers a figment of specification error?," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 165-188, August.
  5. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  6. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
  7. Hoon, Hian Teck & Phelps, Edmund S, 1992. "Macroeconomic Shocks in a Dynamized Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 82(4), pages 889-900, September.
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