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Wage inequality as a worker discipline device under full employment

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  • Jaylson Jair da Silveira

  • Gilberto Tadeu Lima

Abstract

The persistence of wage inequality among observationally equivalent workers remains a salient feature of labor markets, even under full employment. Empirical evidence indicates that higher wages raise on-the-job effort and that persistent wage differentials partly reflect firms’ strategic wage-setting behavior. This paper extends the canonical efficiency wage framework by incorporating firm heterogeneity in wage-setting. In equilibrium, wage inequality functions as a worker discipline device under full employment. As the proportion of efficiency-wage firms rises, the efficiency-to-competitive wage ratio increases monotonically, while the wage Gini coefficient follows an inverted-U pattern, underscoring a nonlinear trade-off between effort incentives and wage dispersion.

Suggested Citation

  • Jaylson Jair da Silveira & Gilberto Tadeu Lima, 2026. "Wage inequality as a worker discipline device under full employment," Working Papers, Department of Economics 2026_12, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2026wpecon12
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    Keywords

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    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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