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Is Perfection Optimal? Employment and Product Market Competition

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  • Bruno Amable

    (PSE)

  • Donatella Gatti

    (PSE & IZA)

Abstract

This paper proposes a model of efficiency wage with endogenous workers flows in interaction with imperfect competition on the product markets. Subject to economy-wide shocks, firms hire and fire workers thus generating a certain turnover. We show that the intensity of this turnover negatively affects workers' incentives and induces higher efficiency wage premia. Increased competition pushes real wages up but effort incentive requirements prevent large wage adjustments. Hence, adjustments are made with quantities: both the separation and hiring rates increase with competition, increasing the wage premium and contributing to lower employment. As a consequence, an employmentmaximising level of competition may exist.
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Suggested Citation

  • Bruno Amable & Donatella Gatti, 2005. "Is Perfection Optimal? Employment and Product Market Competition," Macroeconomics 0507008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0507008
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    References listed on IDEAS

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    Cited by:

    1. Zhiqi Chen & Bo Zhao, 2014. "Unemployment and product market competition in a Cournot model with efficiency wages," Canadian Journal of Economics, Canadian Economics Association, vol. 47(2), pages 555-579, May.

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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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