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The Wage-Productivity Hypothesis: Its Economic Consequences and Policy Implications

Listed author(s):
  • Joseph E. Stiglitz

This paper explores the implications for less developed countries the hypothesis that workers' productivity depends on the wages they receive. In particular, we show that this hypothesis may explain the high urban wages and unemployment found in many such countries. The market equilibrium is shown not to be pareto efficient. If the government could not control urbaxv'rural migration, but could control wages and urban employment, it would, in general, set wages and employment levels differently. The sources of Inefficiency are identified. The (constrained) pareto optimal policy can be implemented via taxes and subsidies; but two instruments (both specific and ad valorern wage tax/subsidies) are required. More generally, policy changes will affect both the urban wage and the level of unemployment, and these consequences need to be taken into accounce, both In the determination of shadow wages to be used in cost benefit analysis and In the analysisis of the incidence of any set of taxes and subsIdIes. The shadow price of labor may differ markedly from what it would be if wages were arbitrarily fixed and there were no migration. In particular, in the special case of the Harris-Todaro migration model, with fixed rural wages and productivity depending only on the absolute wage received, the shadow wage is the market wage, regardless of the relative evaluation of current and future consumption. Shadow prices under other specifications of the wage-productivity relationship are analyzed.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1976.

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Date of creation: Jul 1986
Publication status: published as Boskin, Michael J. (ed.) Modern Developments in Public Finance. New York and Oxford: Blackwell, 1987.
Handle: RePEc:nbr:nberwo:1976
Note: LS
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  1. Todaro, Michael P, 1969. "A Model for Labor Migration and Urban Unemployment in Less Developed Countries," American Economic Review, American Economic Association, vol. 59(1), pages 138-148, March.
  2. Schlicht, Ekkehart, 1978. "Labour Turnover, Wage Structure, and Natural Unemployment," Munich Reprints in Economics 1255, University of Munich, Department of Economics.
  3. Calvo, Guillermo, 1979. "Quasi-Walrasian Theories of Unemployment," American Economic Review, American Economic Association, vol. 69(2), pages 102-107, May.
  4. Stiglitz, Joseph E, 1973. "Approaches to the Economics of Discrimination," American Economic Review, American Economic Association, vol. 63(2), pages 287-295, May.
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
  6. Salop, S. C., 1973. "Wage differentials in a dynamic theory of the firm," Journal of Economic Theory, Elsevier, vol. 6(4), pages 321-344, August.
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