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Investigating rationality in wage-setting

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  • Bhalotra, Sonia

Abstract

This paper investigates the efficiency wage hypothesis and derives a tractable expression for the profit loss incurred by deviations from the efficiency wage. The extent of the wage deviation can be inferred from production function parameters. The resulting profit loss shown to depend upon the curvature of th effort function and the employment and wage elasticities of output. If the profit loss is small then near rationality may be claimed even if the hypothesis of rationality is statistically rejected. An application to Indian manufacturing is presented, which suggests that rationality cannot be rejected and that the profit function is remarkably flat aroung the optimum. This is consistent with positive effort returns to increasing the wage beyond its efficient level.

Suggested Citation

  • Bhalotra, Sonia, 1998. "Investigating rationality in wage-setting," LSE Research Online Documents on Economics 6682, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:6682
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    File URL: https://researchonline.lse.ac.uk/id/eprint/6682/
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    2. Bhalotra, Sonia R., 1998. "Changes in utilization and productivity in a deregulating economy," Journal of Development Economics, Elsevier, vol. 57(2), pages 391-420.

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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