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Efficiency Wages in Heterogenous Labour Markets

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Abstract

In this paper we tackle two shortcomings of present efficiency wage models. Firstly, they do not fully account for labour heterogeneity, thus implying that high-effort and low-effort units of labour are interchangeable. Secondly, building on this assumed homogeneity of labour, the models derive involuntary unemployment from effort decisions of workers, which are patently voluntary. We offer a consistent reformulation of the theory: Each of the effort or quality levels is regarded as a separate market which has its own clearing quantity and price. As such unemployment is a result of workers' reluctance to adjust to the prevailing market conditions on the respective labour sub-market. To further clarify heterogeneity in labour markets, we propose to employ the demand for workers' characteristics instead of the demand for workers. This microeconomic approach shows that in standard equilibrium employers will not choose among all workers but only select specific characteristic-types. Therefore to become attractive, an unemployed worker has to significantly alter either his wage or the bundle of offered characteristics. Both these modifications reinforce our central claim that free market interaction cannot lead to unemployment other than voluntary.

Suggested Citation

  • Pavel Ryska & Jan Prùša, 2011. "Efficiency Wages in Heterogenous Labour Markets," Working Papers IES 2011/28, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2011.
  • Handle: RePEc:fau:wpaper:wp2011_28
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    File URL: http://ies.fsv.cuni.cz/default/file/download/id/17262
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    References listed on IDEAS

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    1. Bellante, Don, 1994. "Sticky Wages, Efficiency Wages, and Market Processes," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 8(1), pages 21-33.
    2. Dale T. Mortensen & Bent Jesper Christensen & Jesper Bagger, 2010. "Wage and Productivity Dispersion: Labor Quality or Rent Sharing?," 2010 Meeting Papers 758, Society for Economic Dynamics.
    3. Marek Rusnak & Tomas Havranek & Roman Horvath, 2013. "How to Solve the Price Puzzle? A Meta‐Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 37-70, February.
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    More about this item

    Keywords

    labour market; efficiency wages; involuntary unemployment; demand for heterogeneous goods.;

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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