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Effective Demand, Labor Discipline and Wage Inequality

Author

Listed:
  • Gilberto Tadeu Lima

  • Jaylson Jair da Silveira

Abstract

We develop a macrodynamic model in which firms’ choice of wage-formation strategy is determined by an evolutionary game-theoretic equilibrium notion. Each firm may operate either as a wage setter, adopting an efficiency-wage strategy, or as a wage taker within the non-efficiency-wage segment of the labor market. The unique evolutionarily stable strategy is a mixed strategy, where the probability assigned to each wage-formation strategy varies as a monotonic function of the employment rate. This rate, together with other macroeconomic variables, is determined by aggregate effective demand. A central feature of the model economy is a feedback mechanism linking cross-firm heterogeneity in wage-formation strategies—and the associated dispersion in labor productivities, real wages, profit shares, and employment levels—to the employment rate. This rate, together with capital capacity utilization and output growth, may exhibit endogenous, self-sustaining cyclical fluctuations over time. This implies that inequalities in labor productivities, real wages, and employment levels across otherwise observationally equivalent workers may display analogous cyclical dynamics as well.

Suggested Citation

  • Gilberto Tadeu Lima & Jaylson Jair da Silveira, 2026. "Effective Demand, Labor Discipline and Wage Inequality," Working Papers, Department of Economics 2026_15, University of São Paulo (FEA-USP), revised 19 May 2026.
    • Handle: RePEc:spa:wpaper:2026wpecon15
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    Keywords

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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E14 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Austrian; Evolutionary; Institutional
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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