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Wage Setting in Modern Labor Markets: Neither Fair Nor Efficient

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  • Schlicht, Ekkehart

    () (University of Munich)

Abstract

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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    Keywords

    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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