On involuntary unemployment: notes on efficiency-wage competition

Guerrazzi, Marco (2012): On involuntary unemployment: notes on efficiency-wage competition.

Abstract

This paper introduces a model of efficiency-wage competition along the lines put forward by Hahn (1987). Specifically, I analyse a two-firm economy in which employers screen their workforce by means of increasing wage offers competing one another for high-quality employees. The main results are the following. First, using a specification of effort such that the problem of firms is concave, optimal wage offers are strategic complements. Second, a symmetric Nash equilibrium can be locally stable under the assumption that firms adjust their wage offers in the direction of increasing profits by conjecturing that any wage offer above (below) equilibrium will lead competitors to underbid (overbid) such an offer. Finally, the exploration of possible labour market equilibria reveals that effort is counter-cyclical.

• Item Type: MPRA Paper
• Language: English
• Keywords: Efficiency-Wages; Wage Competition; Nash Equilibria; Effort
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Labor Contracts; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

References

Akerlof G.A. (1982), Labor Contracts as Partial Gift Exchange, Quarterly Journal of Economics, Vol. 79, No. 4, pp. 543-569.

Akerlof G.A. (1984), Gift Exchange and Efficiency-Wage Theory: Four Views, American Economic Review, Vol. 74, No. 2, pp. 79-83.

Alexopoulos M. (2004), Unemployment and the Business Cycle, Journal of Monetary Economics, Vol. 51, No. 2, pp. 277-298.

Bacharach M. (1976), Economics and the Theory of Games, London: Macmillan Press.

Bowles S. (1985), The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models, American Economic Review, Vol. 75, No. 1, pp. 16-36.

Cournot A. (1838), Recherces sur les Principes Mathematiques de la Theorie de la Richesse, Paris: L. Hachette.

Drago R. (1989-1990), A Simple Keynesian Model of Efficiency Wages, Journal of Post Keynesian Economics, Vol. 12, No. 2, pp. 171-182.

Faria J.R. (2000), Supervision and Effort in an Intertemporal Efficiency Wage Model: The Role of the Solow Condition, Economics Letters, Vol. 67, No. 1, pp. 93-98.

Faria J.R. (2005), Profitability, Investment, and Efficiency Wages, Journal of Applied Mathematics and Decision Sciences, Vol. 2005, No. 4, pp. 201-211.

Gourinchas P.O. and A. Torell (2001), Exchange Rate Dynamics, Learning and Misperception, NBER Working Paper, No. 9391.

Guerrazzi M. (2008), A Dynamic Efficiency-Wage Model with Continuous Effort and Externalities, Economic Issues, Vol. 13, No. 2, pp. 37-58.

Hahn F.H. (1987), On Involuntary Unemployment, Economic Journal, Supplement: Conference Papers, pp. 1-16.

Huang T-L., A. Hallam, P.F. Orazem and E.M. Paterno (1998), Empirical Tests of Efficiency Wage Models, Economica, Vol. 65, No. 257, pp. 125-143.

Jellal M. and F-C. Wolff (2002) Dual Labor Market and Strategic Efficiency Wage, International Economic Journal, Vol. 17, No. 3, pp. 99-112.

Kopel M. (1996), Simple and Complex Adjustment Dynamics in Cournot Duopoly Models, Chaos, Solitons & Fractals, Vol. 7, No. 12, pp. 2031-2048.

Krueger A.B. and L.H. Summers (1988), Efficiency Wages and the Inter-Industry Wage Structure, Econometrica, Vol. 56, No. 2, pp. 259-293.

Lindbeck A. and D.J. Snower (1987), Efficiency-Wages Versus Insiders and Outsiders, European Economic Review, Vol. 31, No. 1-2, pp. 407-416.

Raff D.M.G. and L.H. Summers (1987), Did Henry Ford Pay Efficiency Wages, Journal of Labor Economics, Vol. 5, No. 4, pp. S57-S86.

Sandholm W.H. (2005), Excess Payoff Dynamics and Other Well-Behaved Evolutionary Dynamics, Journal of Economic Theory, Vol. 124, No. 2, pp. 149-170.

Shapiro C. and Stiglitz J. (1984), Equilibrium Unemployment as a Worker Discipline Device, American Economic Review, Vol. 74, No. 3, pp. 433-444.

Solow R.M. (1979), Another Possible Source for Wage Stickiness, Journal of Macroeconomics, Vol. 1, No. 1, pp. 79-82.

Uhlig H. and Y. Xu (1996), Effort and the Cycle: Cyclical Implications of Efficiency Wages, Tilburg University Discussion Paper, No. 49.

van de Klundert T. (1988), Wage-Differential and Employment in a Two-Sector Model with a Dual Labour Market, Research Memorandum, Department of Economics, Tilburg University.

Varian H.R. (1992), Microeconomic Analysis, 3rd Edition, New York: W.W. Norton & Company.

Weiss A. (1991), Models of Unemployment, Layoffs, and Wage Dispersion, Claredon Press, Oxford.