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Wage Setting in Modern Labor Markets: Neither Fair Nor Efficient


  • Schlicht, Ekkehart

    () (University of Munich)


The increasing wage inequality in many countries is usually seen as brought about by economic forces that drive for economic efficiency within a changing technological and social environment. Ethical evaluations of these developments diverge, yet the view that free labor markets drive to efficiency remains undisputed. This note sets out to criticize, in a non-technical manner, this efficiency presumption which is based on Adam Smith’s theory of wage setting. It is urged that a Smithian wage structure would indeed be both efficient and fair. Yet modern labor markets work in ways that are fundamentally different to what was envisaged by Adam Smith. That makes the outcomes observed in modern labor markets, according to Smithian standards, both inefficient and unfair. As a consequence, the pursuit of the Smithian ideal requires organizational remedies, intervention and regulation in labor markets.

Suggested Citation

  • Schlicht, Ekkehart, 2011. "Wage Setting in Modern Labor Markets: Neither Fair Nor Efficient," IZA Policy Papers 26, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izapps:pp26

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    References listed on IDEAS

    1. Aydemir, Abdurrahman & Sweetman, Arthur, 2006. "First and Second Generation Immigrant Educational Attainment and Labor Market Outcomes: A Comparison of the United States and Canada," IZA Discussion Papers 2298, Institute for the Study of Labor (IZA).
    2. Abdurrahman Aydemir, 2003. "Effects of Business Cycles on Labour Market Assimilation of Immigrants," Labor and Demography 0309010, EconWPA.
    3. Ana Ferrer & David A. Green & W. Craig Riddell, 2006. "The Effect of Literacy on Immigrant Earnings," Journal of Human Resources, University of Wisconsin Press, vol. 41(2).
    4. Statistics Canada, 2003. "Will They Ever Converge? Earnings of Immigrants and Canadian-born Workers over the Last Two Decades," Analytical Studies Branch Research Paper Series 2003215e, Statistics Canada, Analytical Studies Branch.
    5. Abdurrahman Aydemir & Mikal Skuterud, 2005. "Explaining the deteriorating entry earnings of Canada's immigrant cohorts, 1966 - 2000," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 641-672, May.
    6. Antecol, Heather & Kuhn, Peter J. & Trejo, Stephen, 2003. "Assimilation via Prices or Quantities? Labor Market Institutions and Immigrant Earnings Growth in Australia, Canada, and the United States," IZA Discussion Papers 802, Institute for the Study of Labor (IZA).
    7. Ana Ferrer & W. Craig Riddell, 2008. "Education, credentials, and immigrant earnings," Canadian Journal of Economics, Canadian Economics Association, vol. 41(1), pages 186-216, February.
    8. Thomas Liebig, 2009. "Jobs for Immigrants: Labour Market Integration in Norway," OECD Social, Employment and Migration Working Papers 94, OECD Publishing.
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    More about this item


    inequality; compensating differentials; equalizing differentials; fairness; efficiency; efficiency wages; selection wages; Reder competition; collective organization; taxation; over-qualification;

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • D3 - Microeconomics - - Distribution
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • B1 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925

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