Efficiency Wages in Heterogenous Labour Markets

Pavel Ryska () and Jan Prùša ()
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Pavel Ryska: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic, http://ies.fsv.cuni.cz/
Jan Prùša: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic, http://ies.fsv.cuni.cz/

No 2011/28, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: In this paper we tackle two shortcomings of present efficiency wage models. Firstly, they do not fully account for labour heterogeneity, thus implying that high-effort and low-effort units of labour are interchangeable. Secondly, building on this assumed homogeneity of labour, the models derive involuntary unemployment from effort decisions of workers, which are patently voluntary. We offer a consistent reformulation of the theory: Each of the effort or quality levels is regarded as a separate market which has its own clearing quantity and price. As such unemployment is a result of workers' reluctance to adjust to the prevailing market conditions on the respective labour sub-market. To further clarify heterogeneity in labour markets, we propose to employ the demand for workers' characteristics instead of the demand for workers. This microeconomic approach shows that in standard equilibrium employers will not choose among all workers but only select specific characteristic-types. Therefore to become attractive, an unemployed worker has to significantly alter either his wage or the bundle of offered characteristics. Both these modifications reinforce our central claim that free market interaction cannot lead to unemployment other than voluntary.

Keywords: labour market; efficiency wages; involuntary unemployment; demand for heterogeneous goods. (search for similar items in EconPapers)
JEL-codes: J20 J64 (search for similar items in EconPapers)
Pages: 19
Date: 2011-08, Revised 2011-08
New Economics Papers: this item is included in nep-lab
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